Proyecto1 Maquetación 1 - UAB Barcelona Annual Report Annual Report 2008 2008 Customers 259million...

Annual Report

2008

www.telefonica.com Annual Report

2008

Annu

al R

epor

t200

8 Customers

259 million customers accesses

Presence in 25 countries

196 million mobile phone accesses

43 million landline accesses

More than 12 million retail accesses

to Broadband Internet

More than 2 million accesses

to paid television

A 6.92 (out of 10) Customer Satisfaction

rating at the end of 2008

Investment

8,401 million euros of annual

investment (CapEx)

4,614 million euros invested in R+D+I

Professionals

257,000 professionals

69% rating on the Employee

satisfaction index

Environment

Commitment to reduce electricity usage

by 30%* on their networks by 2015

* Kwh/equivalent access

Corporate Responsibility

60,219 employees with training

in Business Principles

More than 1,100 suppliers evaluated

by the Extension of Business Principles

to the Supply Chain

Social and Cultural Activity

Close to 115 million euros in social and

cultural activities with 40 million people

benefiting from the 2008 initiatives

Some 22,000 employees are

Telefónica Volunteers

Thanks to Proniño 107,602 children have

access to school, contributing to the

eradication of child labour in Latin America

Results

57,946 million euros revenue

64% of revenue comes from

outside of Spain

A net profit of 7,592 million euros

1.63 euros per share of net profit

74,574 million euros of

share capitalization

Telefonica•IA08•Portada•Ing:Telefónica•Portadas 17/7/09 10:07 Página 1

Client satisfaction reaches 6.92 points

Telefónica ended 2008with 259 million customeraccesses

Its intense commercial activity allowed it to increase the number of accesses by 30million, the equivalent of a year-on-yearincrease of 13.2%, thanks to advancesobtained in mobile telephony, Broadbandand pay TV.

The mobile accesses were close to 196million by the end of 2008, that is 16.6%more than in 2007. Additionally in a maturemarket like that of fixed line telephony, theCompany closed the financial year with 42.9million accesses, compared to 43.4 millionfrom the previous year. For their part, thewholesale accesses to Broadband Internetwere at 12.5 million at the 31st of December2008, with a year-on-year increase that isclose to 21%, boosted by voice packageservices, ADSL and Pay TV. The TV payaccesses exceeded 2.3 million, whichsupposes an increase of close to 30%.

At the same time, the Telefónica ClientSatisfaction Index (ISC) was at 6.92 out of 10 points at the close of the financialperiod, compared to 6.77 in 20071.

1 The data of the global ISC have been adjusted as aconsequence of the homogenisation project of themeasurement methodology over the whole group. This project allowed the scale and the questions onsatisfaction to be joined, amongst other things.

Share profit increased 41.4%1 in 2008

Telefónica achieved a net profit of 7,592 million euros

The net amount of the business figure (revenue) of Telefónica was at 57,946 million euros in 2008, with a year-on-year increase of 2.7%. The mobilebusiness, with a growing contribution from data, fixed Broadband and Pay TV, is consolidated as the principalmotivators of this organic growth.

The free cash flow generated increased to 9,145 million euros; and the net financialdebt was reduced by 5.6% to 42,733 millioneuros. The net profit for Telefónica increased 38% more in comparable terms and the basic net profit per shareincreased 41.4%1 to 1.63 euros.

In the 2008 financial year, 69% of the cashflow generated was allocated toshareholders, which is equivalent to 10% ofthe shareholding capitalisation of theCompany. Furthermore, amongst the Group priorities, it is important toprogressively increase the dividend per share.

Telefónica ended the year with acapitalisation of 74,574 million euros,occupying fourth place amongst companies in this sector worldwide.

1 Excludes the impact from share sales (Airwave, Endemoland Sogecable) in both periods, as well as the GrupoTelefónica shareholding in the reorganization of theTelco S.p.A. company, as well as on their shareholding inTelecom Italia.

2 On 25/02/09.

The Employee Satisfaction Index increased to 69%

Telefónica gives directemployment to 257,000professionals

Last year, the physical staff of the Company increased by 3.4%. The area ofgreatest growth, close to 5.3% was LatinAmerica, which team already represents 67% of the total. Spain is, with 20%, thesecond region for the size of its team and Europe makes up 11%.

Atento was, with more than 132,000employees, the company which has the greatest number of professionals in the Group.

To the direct jobs can be added about330,000 indirect positions belonging to collaborating companies.

The Employee Satisfaction Index of Telefónica professionals during the lastfinancial year improved 3 points, accordingto the survey on work environment in which 70.4% of employees participated.

The Company objective is to be the bestplace to work. For this they are supportingthe project ‘Promise to the Employee”, withfour pillars of action: improve employeesatisfaction by offering them an optimalwork environment; consolidate a culture ofhigh performance; behave like aninternational company and share talent.

4,614 million dedicated to TechnologicalInnovation, that is 5% more

Telefónica CapEx in 2008 increased to 8,401million euros

In 2008, the Group emphasised thedeployment of fibre, the development ofmobile Broadband and transformation ofthe network to gain efficiency.

Their investment in R+D+I1 was 4,614 million euros, 5% more than in 2007. Specifically, the effort in R+D increased to 668 million euros, an increase of 12.5%.

The Company pushed their innovationcollaboration models: support totechnological companies via Movilforum; the acquisition of minority shareholdings in innovative companies like Loomia; LivingLabs to count on the experience of the users to carry out services, etc.

At the same time, the Business Divisions ofTelefónica have been innovating in order tolaunch TV services, increase the possibilitiesof new Broadband networks, etc.

Telefónica Research and Developmentmaintained itself as the most important R+D private company organisation in Spain, with over 211 million euros of activity in 2008. The company participates in more than 200 projects with nearly 1,000 organizations, including more than 150 Universities.

1 Investment in technological innovation calculated inaccordance the criteria established by the OCDE.

More than 30,000 suppliers awarded in 2008

Telefónica awarded morethan 25,926 million euros to their suppliers

The Network infrastructures, Services andWorks, Market Products (including customerdevices, highlighting mobile terminals)represent 80% of the Company purchases.

The top ten main suppliers by amount spentwere: Nokia, Sony Ericsson, Ericsson, NokiaSiemens, Huawei, Samsung, Apple, AlcatelLucent, Motorola and LG.

In 2008 Telefónica promoted electronicdealings, which exceeded 18,000 million euros (34,410 deals). The electronic salesplatform of the Company exceeded 18,000providers – 12% more than the previous year –from 18 countries in Europe and Latin America.

Electronic processing operations amounted to 7,406 million euros in 2008, and advanced the deployment of the electronic invoice with suppliers (18,000 invoices weresubmitted in Spain).

On the other hand, in 2008, Telefónicaintensified their collaboration with TelecomItalia and China Unicom interchanging thebest practices in procurement processes and systems and carrying out purchasestogether with the relevant suppliers.

More than 60 initiatives carried out

Telefónica invested morethan 370 million euros1 toreduce the digital divide

The Company designated 275 million euros to Universal Service Funds; nearly 15 million to training in Information andCommunication Technology and more than 80 million in projects to reduce theeconomic and geographic divide.

In total Telefónica carried out more than 60 digital inclusion projects in 2008. The‘Extension Plan for Rural Broadband” inSpain; the ‘2008 Coverage” programme inEcuador; or ‘Include me” in Peru are someexamples. Also in Spain, coverage of ruralsettlements was increased to 87% comparedto an average of 70% in the European Union;and in Ecuador mobile coverage in suburbanand rural areas and the road networkreached 87.2%.

At the close of the financial year, Telefónicahad more than 6 million prepaid fixed linesconsumer controlled in Spain and LatinAmerica; and in the latter region more than82% of their 123 million clients for mobileservices used prepaid products.

In 2008, more than 230,000 peoplebenefited from Telefónica trainingprogrammes to reduce the educational divide.

1 104 million euros correspond to the net cost for 2007 forthe Universal Service by Telefónica Spain.

More than 1,100 suppliers assessed for CR during the last financial period

60,219 employees1

received training in theBusiness Principles

By 1st March 2009, close to 50% of professionals had been trained in the ethics code, with the objective ofreaching one hundred percent in 2011.

The Business Principles channels at thedisposal of the employees, received a total of 169 communications in reference to their interpretation and application. Also as a consequence of investigations for possible deviations from the Principles,358 interventions were carried out to ensure compliance.

As part of the application of their Extension of Business Principles t0 the Supply Chain, the Company carried outmore than 1,100 evaluations of suppliers 10%over the objective planned for the first year,and 55 audits.

Additionally they approved internal policies on Data Protection and RiskManagement, and defined the basic lines for the Promotion of Integration of Disabled people into the Workplace. The Company will deploy ten policies in full force over the next three years.

1 Employees trained as of 1st March 2009. Teleoperationpersonnel are excluded.

2 Includes container business, tgestiona and others.

Fundación Telefónica benefited more than 40 million people

Telefónica allocated close to 115 million euros to social and culturalprojects in 2008

Investment increased 23% compared to2007, according to the LBG internationalmethodology. A year later the initiativescentred on improving education andpromoting equal opportunities.

The Fundación Telefónica, the pillar of social and cultural action of the Group,invested nearly 70 million euros in 3,565projects. The Foundation carried out fivelarge transnational programmes: EducaRed;Proniño; Telefónica Volunteers, with 21,807employees; Debate and Understanding, aswell as Art and Technology. They are presentin 8 countries: Argentina, Brazil, Chile,Columbia, Spain, Mexico, Peru and Venezuelaand it reaches 14 with some programs.Amongst the most notable milestones of2008, the 107,602 children schooled byProniño should be mentioned, 103% morethan the previous year, to contribute toeradicating child labour in Latin America.

Other projects are being carried out viasocial and cultural sponsorship, with aninvestment of 32 million euros in 2008;ATAM, the Telefónica association aimed atincreasing quality of life for disabled people,to which 58,226 employees belong; and theactivities of Telefónica Europe.

1 Telefónica Europe counted on about 1,000 volunteeremployees in 2008.

In 2008 electric consumption decreased by 5%1

Telefónica commits to reduce electricity consumption by 30%1 on its networks by 2015

In 2008, the Company also announced that itwould cut electrical consumption in its offices by10% by 2015. This will considerably decreaseGreenhouse Gas Emissions globally.

Telefónica created its Climate Change Office witha twin objective. The first, focused on thereduction of energy consumption in Groupoperations, by means of energy efficiencyactivities, and the second, directed at thedevelopment of business opportunities by means of products and services that allow other sectors to be more efficient.

The climate change strategy is based on 5 coreactivities: Operations, Suppliers, Employees,Customers and Society.

The Operation core is in charge of promotingenergy efficiency on networks and systems, aswell as promoting the use of renewable energies.The Suppliers core seeks to include energyefficiency requirements in the acquisitionprocesses for products and services for the wholeGroup. The Employee core creates a culture that isfocused on an adequate use of resources. TheCustomer core boosts the use of products andservices which allow other sectors to reduce theirenergy consumption and greenhouse gasemissions. And the Society core works to positionTelefónica as a telecommunications company thatis a leader in the fight against climate change.

1 Kwh/equivalent access.2 Kwh/No. of employees.

2008 2007

Telefónica Group2008 2007

Telefónica Spain

2008 2007

Telefónica Europe2008 2007

Telefónica Latin America

1,8

18

1,6

72

65

2

56

0

58

3

54

258

3

59

5

Telefónica’s carbonfootprintThousands of tonnes of CO2

203.2

2006

228.7

2007

258.8

2008

Total AccessesMillions

4,301

2006

4,384

2007

4,614

2008

Investment in TechnologicalInnovation (R+D+I)1

Millions of euros

24,179

2006

25,240

2007

25,926

2008

Sales volumesMillions of euros

22,142

25,169

12,908

Telefónica Spain2

Telefónica Latin AmericaTelefónica Europe

Employees trained inBusiness Principles1

29,349

173,014

52,576

Telefónica SpainTelefónica Latin AmericaTelefónica EuropeRest

2,096

Physical Staff by Region

2007

2008

2625

363837

Spain Latin America Europe Rest

36

1 1

Revenue Distribution by RegionPercentagellones de euros

Investment in social and cultural activities

Telefónica FoundationSocial and Cultural SponsorshipsATAMTelefónica Europe social activities

60.3%

8.0%

3.4%

28.3%

Driving force for progress

Contribution towards progressEconomic Impact Revenue/GDP Magnitudes

Inclusion incentives per type of divide

EconomicGeographicEducationalDisabled

14%

26% (

0%)

49%

11%

• Economic data in millions of euros (revenue, personnel costs, payment of taxes, purchases and investments (CapEx)• Revenue amounts: consolidated revenue amounts corresponding to all the business units of Telefónica in the country.• TEF/GDR Revenue: ration between Telefónica revenue (contribution from the country to the revenue consolidation of the Telefónica Group) and the estimated GDR for the country (Source: FMI).• CapEx amounts in current euros.• Employees: Direct employees of the Telefónica Group in the country (physical staff at 31st December 2008).• Suppliers: Number of suppliers that were selected in the country in 2008. The % of local suppliers represents the % of the awards made to suppliers based in the country over the total

volume awarded in the country.• Accesses: equals the number of fixed + mobile + Broadband + Paid TV accesses (units in thousands).

SpainSpain Income 20,943 Employees 52,576

Payments Suppliers awarded contracts 4,212 (88.0%)

7,963 2,303 2,686 3,005 Total accesses 47,350

Morocco Income 67 Employees 2,096

Payments Suppliers awarded contracts 341 (73.0%)

248 1 4 12 Total accesses 7,434

EuropeGermany Income 3,561 Employees 4,805


1,654 924 47 351 Total accesses 15,542

Ireland Income 929 Employees 1,538


270 82 112 91 Total accesses 1,728

Czech Republic Income 2,556 Employees 9,563

+ Slovakia Payments Suppliers awarded contracts 394 (72.9%)

462 293 482 288 Total accesses 8,609

UK Income 7,207 Employees 13,133


3,243 861 840 628 Total accesses 19,811

Latin AmericaArgentina Income 2,627 Employees 21,550


1,033 379 563 408 Total accesses 20,727

Brazil Income 9,132 Employees 82,288


5,274 1,653 3,657 985 Total accesses 60,739

Chile Income 1,942 Employees 13,712


1,010 452 221 245 Total accesses 10,014

Central America Income 570 Employees 5,778


303 126 90 61 Total accesses 6,158

Colombia Income 1,496 Employees 6,108


858 426 293 137 Total accesses 12,803

Ecuador Income 307 Employees 1,083


188 133 34 26 Total accesses 3,212

US and Puerto Rico Income 103 Employees 810


38 6 2 31 Total accesses n.a.

Mexico Income 1,776 Employees 17,768


929 354 37 180 Total accesses 15,464

Peru Income 1,615 Employees 15,213


1,072 293 375 215 Total accesses 14,983

Uruguay Income 161 Employees 615



Venezuela Income 2,819 Employees 8,089


1,239 310 718 166 Total accesses 11,905

1.8%

0.1%

0.1%

0.5%

1.7%

0.4%

1.1%

0.8%

1.6%

1.0%

0.9%

0.8%

0.0%

0.2%

1.8%

0.8%

1.2%

Telefónica Revenue Volume of contracts awarded Investments (Capex) Tax payments Salaries


Contents

04 Letter from the Chairman

08 International presence

10 Group description

1 1 Group structure

12 Board of Directors

13 Management team

14 Our current activitiesCurrent panorama. ICT at the centre of the solution 16

20 Telefónica, better placed than ever

For its economic impactCustomers* 22

Satisfaction index 23

Share value 24

Results 26

Products and services 28

Innovation 30

Infrastructures 32

For its social impact*Employees 34

Employee satisfaction 35

Suppliers 36

Digital inclusion 38

Driving force of progress 40

Business Principles 42

Social and cultural action 44

For its environmental impact*Climate change 46

48 Strategy

56 Results

120 Risk management

126 History

130 Chronology

* These chapters extend the 2008 Annual Report for Corporate Responsibility for the Company. As such the information referring to social and cultural activities being carried out by the Telefónica Foundation appears in the Annual Report.

Letter from the Chairman

04 Telefónica, S.A. Annual Report 2008

Dear Shareholder,

I would like to express my gratitude forhaving every year the opportunity ofexplaining in this letter the results ofTelefónica in 2008, a year in which we haveseen again the advantages of Telefónica’sdifferential profile: the high diversificationof our businesses, the integrated nature ofour operations, our competitive strength inkey markets, our high capacity for executionand our sound financial position.

In a difficult period for the economicactivity, Telefónica has distinguished itselfby its solid growth and at the same time ithas increased its customer base, its capacityfor innovation and its operational flexibility.

Let me share with you some of the keypoints and figures behind this performance,as well as my confidence in Telefónica, that will continue to overcome, reinforcingits leadership as a company and as aninvestment deserving your trust.

Differential results

In the 2008 financial year, Telefónicaachieved an income of 57,946 million euros. In terms of organic growth, income increased by 6.9%, with positivedevelopments in all countries and withspectacular performance in Latin America.Thanks to greater efficiency in costmanagement, the Operating Income BeforeDepreciation & Amortisation (OIBDA) andthe Operating Income (OI) grew 14.7% and28.7% excluding capital gains, respectively.Likewise, there was a significant rise inOperating Cash Flow (OIBDA-CapEx) of20.2% that reached 14,159 million euros.

In 2008, in absolute terms, consolidated net profit amounted to 7,592 million euros, which, in comparable terms, meant a year-on-year increase of 38% and a growth of basic net profit per share of 41.4% to 1.63 euros.

The achievements in economic-financialmatters meet all our market commitments,reinforcing the Company’s credibility andhighlighting the value of the highdiversification of its operations.

Priority to pay shareholders

Shareholder remuneration is a priority towhich we have dedicated 69% of the cashflow in 2008, through the combination of apayment of dividends and the repurchase oftreasury shares. In 2009 we are reinforcingour shareholder remuneration with aproposal to increase the dividend to 1.15euros per share. In this regard, Telefónicaexpects to increase consolidated operatingcash flow within a range of between 8% and 11% in 2009, assuming constantexchange rates. Furthermore, the Companymaintains its objective of reaching a netprofit per share of 2.304 euros and a cashflow per share of 2.87 euros in 2010.

By the end of 2008, Telefónica was the third largest telecommunicationscompany in the world by firm value (market capitalization plus net debt) and the 32nd largest company of any sector by market capitalization.

The strength of a global leader

The best proof of our dynamism andstrength for the future is the continuedincrease in the number of customers whotrust us to meet their telecommunicationsrequirements. Our customers increased 13.2%in the past year, to reach 259 million accesses,approaching our goal of 290 million in 2010.

In terms of business units, I would like toemphasize Telefónica España’s 13.7% increasein the broadband retail accesses, whichreached over 5.2 million. Rather more than85% of these accesses are included in adouble or triple offer package which,together with the net gain of 923,076 mobilelines within the post-paid segment, isevidence of Telefónica’s commercial strengthin Spain. Furthermore, mobile devices with3G capacity among our customers alreadyamount to 6.2 million, opening up greatprospects for the growth of mobile Internet.

In 2008, Telefónica Latinoamérica wasconsolidated as the driving force behind theGroup’s growth, with an outstanding year-on-year increase of 22.7% of mobile accessesto which all the operations contributed andwhich meant a total figure of 123.4 millionaccesses. Our fixed broadband accesses inthe region surpassed 6 million, which wasaccompanied by remarkable progress in theprocess of transforming operations. In Brazilalone, Telefónica reached more than 60million accesses, 24% more than in 2007.

And finally, Telefónica Europe has recorded a9% rise in the number of accesses, reaching45.8 million, maintaining its leadingposition in the United Kingdom both in itsfinancial and operating parameters and inmobile and Internet customer satisfaction.

Annual Report 2008 Telefónica, S.A. 05

A solid company in aresilient and promisingsector

The deployment of digital services in asociety is as essential for prosperity as masstransport or industrial production havebeen in the past. Telecommunications,together with IT, becomes a driving force forfostering a new and necessary growth cycle.

In today’s complex macroeconomicenvironment, our sector, thanks to themultiplier effect that broadband has in thegeneration of employment and wealth, aswell as its own growth and weight on theeconomy, is becoming an essential part inany proposal for stimulating the economyand creating sustainable employmentworldwide. The deployment of high capacity fixed and mobile networks is,therefore, the key for competitiveness and wealth in the new world economicorder that is being created.

On the other hand, the business model for telecommunications can not be morerobust. We have direct access to ourcustomers, we offer them continuouslyvalue and we receive recurrent incomesfrom them. Telecommunications are alreadyessential for people who are not going todismiss the benefits of being connected andfor Public Administration and companiesbecause they enhance productivity andcompetitiveness.

Innovation continues and exceeds in itsscope that of any other industry. Mobilityand broadband continuously contribute tonew possibilities of value added servicesaround economic transactions, health,education, contents or e-administration, just to mention some of the areas whereTelefónica is already present. As a result,life is already irreversibly digital and will

become more and more so.

Telecommunications companies have also been maintaining a high level oftransparency and financial discipline for a long time, with one of the lowest ratios of debt over EBITDA of any industry.

The telecommunications sector is a sector of growth and figures like those ofTelefónica show this. However, it would bean error to think that it is immune to theeconomic environment. Without legalsecurity and a predictable regulatoryframework it will not be possible for theprivate sector to address the huge amountof required investments to continueincreasing communications capacity inevery country. At the same time, theconsumers will be more demanding, andthat will require an increasing emphasis on maintaining close relations with them,on innovation and on efficiency.

In Telefónica, we have the optimum scaleand diversification to compete at globallevel, to benefit from cost and investmentsavings, to offer convergent solutions and toshare best practices. Our industrial alliancewith Telecom Italia, our global agreementwith China Unicom and other alliances with some of the main agents of the digital environment are clear examples of the benefits of scale and our capacity for cooperation.

The efficiency and financial discipline of ourmanagement model have always been onestep ahead from those of our competitors,being the point of reference for the sector.In 2008, Telefónica reduced its average debt by 7.6%. The debt ratio (net debt overOIBDA) was 1.89 times, reflecting thepositive progress in the financial solidity of the Company. The composition of our investments is another factor ofsustainability for Telefónica, because onlyaround 25% of the investment is recurrentand the rest intended for transformationand innovation, which offers sufficientflexibility of management to maintain cash flow growth if required.

As I have already pointed out in otheroccasions, in Telefónica we have beenaddressing our transformation veryseriously for years,. We keep on movingforward and finding new opportunities toextend our capacity for innovation in orderto do things better and more efficiently, and to improve the satisfaction of ourcustomers as well as our knowledge of them. Every day these activities open new paths for making us better andtherefore more solid.

Telefónica has the confidence from themarket and from its customers and wecontinuously contribute responsibly toSociety not only through our integrity andtransparency policies, but also with socialaction programmes as those run by the Fundación Telefónica. From theseprogrammes we should emphasize Proniño, through which we contribute to the eradication of child labour in LatinAmerica, and Educared, which aims toimprove the quality of education and access to it through Information andCommunications Technologies (ICT).

Letter from the Chairman


Telefónica also maintains a determinedcommitment for ensuring that its networksare efficient in terms of power consumptionand that environmental aspects aremanaged responsibly in all its operations,creating a culture of sustainability withinthe Company. A clear example of this is thatour own headquarters have the largestsolar platform on the roof in all of Europeand one of the biggest in the world.Telefónica also works for increasing powerefficiency in its customers’ operationsthrough ICT, a key tool in the reduction of polluting emissions.

The Telefónica of the future

Nobody is better placed than Telefónica to face the challenges of the future. All in all, and with our recognized team ofprofessionals, I am confident in telling you,certainly and with no arrogance, that we arecertain to have, in the present context, theopportunity to emerge stronger. There is no doubt at all that Telefónica will have amore and more decisive role in the future of telecommunications and digital services,in particular, and of the global economy ingeneral. This is a leadership responsibilitythat we welcome with enthusiasm and that we will meet with high standards and effort.

Thank you again on behalf of Telefónica andits Board of Management for your supportand confidence.

César Alierta IzuelChairman of Telefónica, S.A.


Telefónica offer services in 21 countries and has an

additional presence in 4 others

Telefónica is present in 25 countries

In geographical terms, the Company possesses an ideal revenue distribution: in 2008 they obtained 36% of revenue in Spain, 38% in Latin America, 25% in Europe and 1% in the other markets.

International Presence


* Data in thousands on 31 December 2008.1 Actual percentage of Telefónica Group.

Without considering minority interests, the shareholding of Telefónica Groupwould be 10%.

Fixed market positionMobile market position

Ecuador

Mobile accesses3,123

Fixed wireless accesses89

2

Brazil

Fixed telephony accesses11,662

Data and Internet accesses3,626


Pay TV accesses472

12

Uruguay


1

Chile


Data and Internet accesses744


Pay TV accesses263

11

Argentina




21

Peru




Pay TV accesses654

11Venezuela


Fixed Wireless accesses1,313

Pay TV accesses9

2

Puerto RicoComplementaryActivities

United StatesComplementaryActivities

Colombia




Pay TV accesses142

1 2

Mexico


Fixed Wireless accesses134

2

Central America (El Salvador, Guatemala,Nicaragua y Panama)

Fixed telephony accesses437



2


Present in 25 countries 196 million

mobile accesses

43 millionfixed telephonyaccesses

Over12 millionbroadbandaccesses

Over2 millionpay TV accesses

259 millioncustomer accesses

4,614 millioneuros invested in R+D+I

Over 257,000

professionals

57,946 millioneuros in revenue

64% of revenuegenerated outsideSpain

United Kingdom



1

Ireland


2

Slovakia

Mobile accesses455

3

Czech Republic




Pay TV accesses114

21

Italy

Indirect shareholdingof Telefónica withvoting rights inTelecom Italia, 10.36%

Germany



4

Morocco


Fixed Wireless accesses7

Portugal

Shareholding of9.86%

in Portugal Telecom1

Spain




Pay TV accesses612

11

China

Shareholding of5.38%

In China UnicomLimited

The Company's organisational structurepromotes its scale and diversity as

competitive advantages in the sector

Telefónica is organised structurally in threegeographical regions: Spain, Latin America and Europe

During 2008, the Group consolidated its Multilocal Management model to take maximum advantage of shared business models and differential capacities.

Organisational profile

Corporate CentreTelefónica's Corporate Centre is responsiblefor defining global and organisationalstrategies, corporate policy, management of joint activities and coordinating thebusiness units. During 2008, it reinforced its commitment to these units by carryingout a reorganisation that resulted in thecreation of two business divisions: the firstdedicated to innovation, with the aim ofhelping to increase revenues; the seconddealing with transformation in order to increase efficiency.

Telefónica EspañaThe activity of Telefónica España, which isconcentrated in maximum value sectors,extends to fixed telephony services(including pay TV), mobile telephony and Broadband and includes investments in Morocco (via Meditel).

Telefónica LatinoaméricaTelefónica Latinoamérica operates in 13 countries, offering fixed and mobilebusiness telephony, internet, Broadband andpay TV: Argentina, Brazil, Chile, Colombia,Ecuador, El Salvador, Guatemala, Mexico,Nicaragua, Panama, Peru, Uruguay and Venezuela. In addition, TelefónicaInternational Wholesale Services provideswholesale telecommunications servicesworldwide. This catalogue of servicesincludes Voice, Capacity, IP, Satellite,Corporate and mobile services, providing connectivity between LatinAmerica, United States and Europe over an optical fibre network. Finally, Telefónica is carrying out complementary activities in Puerto Rico and United States.

Telefónica EuropeThe activity of Telefónica Europe centres onfixed and mobile telephony and Broadbandin Europe and it operates in the UnitedKingdom, Ireland, Germany, Czech Republicand Slovakia. In these markets Telefónicaoperates under the O2 brand.

Telefónica O2 Europe plc was renamedTelefónica Europe plc on 1 June 2008. Twoyears after its acquisition, this change is part of the natural process of integration into Telefónica. Thus, the name form of the companies operating in all regions now has the same structure - TelefónicaEspaña, Telefónica Latinoamérica andTelefónica Europe.

Partnerships and other shareholdingsTelefónica is present in China, Italy andPortugal, by means of shareholdings in China Unicom, Telecom Italia, and PortugalTelecom, respectively.

Other companiesAtento provides customer care servicesthrough contact centres. Its operatingplatforms are present in Spain, Argentina,Brazil, Central America, Chile, Colombia, US,Morocco, Mexico, Peru, Puerto Rico, CzechRepublic, Uruguay and Venezuela.

tgestiona offers comprehensivemanagement support services in the areas of financial administration, HR,property, logistics and distribution; process consultancy and ERP; and backoffice integration. It is present in Spain, Argentina, Brazil, Chile and Peru.

Telefónica R+D, which is dedicated totechnological investigation, is the leadingprivate R+D centre in Spain in terms ofactivities and resources. It leads Europe inparticipation in European research projectsand in the ICT sector. It operates in Spain, Brazil and Mexico.

Integrated Multilocal Management modelTelefónica's structure aims to maximise the value of its different operating levels:global, regional and local. Its organisationalmodel is focused on: allowing the customer to take centre-stage; promoting innovation to generate revenues; and maintaining the transformational path. All of these are aimed at making the Company moreefficient and upholding excellence whencarrying out its operations.

Group Description


Julio Linares, Chief Operating Officer of Telefónica S.A.

Above all, 2008 was characterised by the increased presence of the

Company in Telefónica Chile

The Telefónica Group's main shareholdings

Group Structure


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The Company, which is present in 25 countries, bases its organisational model on three regional business units and possesses strategic and industrial alliances in China, Italy and Portugal

Telefónica España% Part

Telefónica de España 100.00

Telefónica Móviles España 100.00

Telyco 100.00

Telefónica Telecomunic. Públicas 100.00

T. Soluciones de Informática yComunicaciones de España 100.00

Iberbanda 58.94

Medi Telecom 32.18

Telefónica Latinoamérica% Part

Telesp187.95

Telefónica del Perú 98.18

Telefónica de Argentina 98.20

TLD Puerto Rico 98.00

Telefónica Chile296.75

Telefónica Telecom 52.03

Telefónica USA 100.00

T. Intern. Wholesale Serv. (TIWS)3100.00

Brasilcel450.00

T. Móviles Argentina 100.00

T. Móviles Perú 98.63

T. Móviles México 100.00

Telefónica Móviles Chile 100.00

T. Móviles El Salvador 99.08

T. Móviles Guatemala 100.00

Telcel (Venezuela) 100.00

T. Móviles Colombia 100.00

Otecel (Ecuador) 100.00

T. Móviles Panamá 100.00

T. Móviles Uruguay 100.00

Telefonía Celular Nicaragua 100.00

T. Móviles Solucionesy Aplicac. (Chile) 100.00

1 Effective participation 88.01%.2 Telefónica Internacional de Chile S.A. owns 44.89% and

Inversiones Telefónica Internacional Holding Ltd. owns51.86%. On 9 January 2009 the second takeover offerwas completed increasing Telefónica Group participationover the Chilean company to 97.89%.

3 Telefónica, S.A. owns 92.51% and Telefónica DataCorpowns 7.49%.

4 Joint Venture which fully consolidates the subsidiaryVivo, S.A., through shareholding in at Vivo Participaçoes,S.A. (63.73%).

Other holdings% Part

3G Mobile AG (Switzerland) 100.00

Grupo Atento 100.00

Telefónica de Contenidos (Spain) 100.00

Mobipay Internacional 50.00

Telco SpA (Italy)142.30

IPSE 2000 (Italy)239.92

Mobipay España213.36

Lycos Europe 32.10

Hispasat 13.23

Portugal Telecom39.86

China Unicom Limited (Hong Kong. China) 5.38

ZON Multimedia45.40

BBVA 0.97

Amper 6.10

1 Telefónica holds an indirect stake of ordinary sharecapital (with voting rights) in Telecom Italia throughTelco of 10.36%. If we take into account the saving shares(azioni di risparmio), which do not have voting rights,the indirect participation of Telefónica over TelecomItalia would be 7.15%.

2 Ownership directly or indirectly held by TelefónicaMóviles España.

3 Telefónica's Group effective stake Telefónica Group stakewould be 10% if we exclude the minority interests.

4 Telefónica's Group effective holding. Telefónica Groupholding would be 5.46% if we exclude minority interests.

Telefónica Europe% Part

Telefónica O2 United Kingdom 100.00

Telefónica O2 Germany1100.00

Telefónica O2 Ireland 100.00

Manx 100.00

Be 100.00

Group 3G (Germany)2100.00

Telefónica O2 Czech Republic169.41

Telefónica O2 Slovakia3100.00

1 Company owned through Telefónica S.A.2 Company owned through Telefónica O2 Germany.3 Company owned through Telefónica O2 Czech Republic.

• •• •• • • • •• • •• • •• • • ••• • •• •• • • • •• • • • •• • • • • • •• •• • • • • • • •• • • • • •• • • • •• • • • •

Their attention is focussed on two key areas for the Company:

innovation and strategy

During 2008, Telefónica created two new consulation committees to reinforce its system of corporate governanceThe Board of Directors of Telefónica, S.A. has set up eight Consultation or Control Committees, in support of its functions and fields of responsibility and which are charged with examining and monitoring key areas.

The Board of Directors of Telefónica, madeup of 17 Directors*, is the Company'ssupervisory body, monitors its activities and has exclusive responsibility in mattersconcerning policy and general strategiesrelated to corporate governance, corporatesocial responsibility, salaries of Directors and senior managers and shareholder’s

return; these responsibilities extend to strategic investments.

Similarly and in accordance with itsregulations, the Board mandates the day-to-day management of the business to the executive bodies andmanagement team of Telefónica.

Board of Directors


* January 2009

Composition of the Board of Directors and its Committees

Nominating, Human Service Compensation Resources, Quality

Audit and and Corporate Corporate and Customer InternationalType of Executive Control Governance Reputation and Regulation Service affairs Innovation Strategy

Director Comission Committee Committee Responsibility Committee Committee Committee Committee Committee

César Alierta Izuel (Chairman)

Isidro Fainé Casas (Vice Chairman)

Vitalino Manuel Nafría Aznar (Vice Chairman)

Julio Linares López (Chief Operating Officer)

José María Abril Pérez

José Fernando de Almansa Moreno-Barreda

José María Älvarez-Pallete López

David Arculus

María Eva Castillo Sanz

Carlos Colomer Casellas

Peter Erskine

Alfonso Ferrari Herrero

Luiz Fernando Furlán

Gonzalo Hinojosa Fernández de Angulo

Pablo Isla Álvarez de Tejera

Antonio Massanell Lavilla

Francisco Javier de Paz Mancho

Non Director SecretaryRamiro Sánchez de Lerín García-Ovíes

Non Director Vice SecretaryMaría Luz Medrano Aranguren•Executive •Director representing major shareholders •Independent •Other external directors

The Company has more detailed information on this subject in the Annual Report on Corporate Governance and in the report on the Compensation Policy of the Board of Directors. These documents can be inspected atwww.telefonica.com/shareholdersandinvestors

It has specific managers for the fixed and mobile

businesses in each region

The Company consolidated its organisationalstructure in order to concentrate on the customerand efficiencyIn order to stimulate evolution of the business and to improve aspects such as quality, Telefónica has created the Innovation and Transformation Business Divisions.

The organisational strategy of Telefónicaseeks to take advantage of economies ofscale and to focus more on customers: itincludes three regional business divisions(Telefónica España, Telefónica Europe andTelefónica Latinoamérica) which report

directly to the Chief Operating Officer;whom in turn reports to the ExecutiveChairman of Telefónica.

In addition to the COO, the GeneralManager for Finance and Corporate

Development and the two GeneralSecretariats: the Legal and Board Secretariatand the Technical Secretariat attached to theChairman's office, which in 2008 became apart of the Executive Committee, report tothe Executive Chairman.

In 2008, in order to spur growth and thetransformation of the Company, two newdivisions were created: the Innovationdivision, in order to contribute to businessdevelopment and as a consequence,

increase the revenue; and theTransformation division that will increase management efficiency. These divisions are integrated within the Operative Committee which is made

up of the Chief Executive; General RegionalDirectors; Director of Transformation and Director of Innovation.

Management Team


César Alierta*

Executive Chairman

Finanz

* Members of the Executive Committee

Julio Linares*

Chief Operating Officer

General Manager ofFinance and CorporateDevelopment

SantiagoFernández Valbuena*

FinanzLegal and BoardSecretary

RamiroSánchez de Lerín

FinanzGeneral Manager of the Chairman'sTechnical Office

Luis Abril*

FinanzTelefónica España

GuillermoAnsaldo*

FinanzTelefónica Europe

Matthew Key*

FinanzTelefónicaLatinoamérica

José MaríaÁlvarez-Pallete*

Our current activities

16 Current panorama. ICT at the core of the solution

Information and Communications Technologies are an economic and social driving force

The world is changing rapidly: new challenges are coming to the fore; people's habits and company needs are changing; new opportunities are emerging for companies in the telecommunication sector...

Information andCommunicationTechnologies are a dailypart of our lives...

The use of the mobile telephone hasbecome widespread. In developed countries,customer penetration already exceeds onehundred percent1-2, and users are demandingnew functions: mobile video, mobiletelevision, instant messaging etc. In allcountries, current and expected growth in the next few years is significant. Even though only one in every two people has a mobile phone, there are now more than 600 million Chinese citizens who use them on their daily basis3.

In Spain, 95% of companies have BroadbandInternet access and over a half have their own corporate website (2008). Over 25% of income tax returns in 2008 were filedonline. 87% of educational centres alreadyhave Broadband access to Internet4.

Users are quick to assimilate new habits.Many current users have already acquired a habit which is becoming more and morecommon: remaining connected at all times.They do this by using multiple means:telephone, computer, smartphone, etc and other technologies.

Many of them, especially the younger ones,naturally take for granted and exercise theirinnate multitasking capacity: for examplethey can answer the telephone whilenavigating the Internet or writing an email.

They are also aware of the great offersavailable on the Internet at the click of a mouse and they demand and select tailor-made quality solutions.

Devices are becoming ever more powerful and offer new functions.Devices for individual and family use aremuch more powerful than those offeredonly a few years ago. Smartphones such asthe iPhone and similar devices, netbooks or Connected TV offer an increasing array of functions to users and new possibilitiesfor operators.

From a pocket device such as the iPhone, a user may simply and safely carry outpurchases and electronic transactions orconnect and converse with other memberson social networking sites while they arereceiving personalised media messages.

...These ensure that the world is ever moreinterconnected...

The user is no longer just a consumer; s/heis also a content creator. The number ofblogs has grown exponentially over recentyears to reach a figure of 130 million by the end of 2008.

Users of social networks are increasingrapidly. The number of Facebook usersmultiplied by 8 in 2 years reaching morethan 100 million in December 2008. In Spain 83% of young Spaniards use social networks5.

China, with only 18% penetration, is now the country with the largest amount ofInternet users in the world. India with a5.4% penetration is fourth6.

The quantity of digital contents willcontinue to increase and it will be possibleto store them in their entirety.People's digital lives will continue to be evermore intense. Digital contents are expectedto increase tenfold between now and 2011and will reach the figure of two zettabytes(two billion gigabytes) in 2016. The cost and size of storage media will significantlydecrease over the next few years (they willbecome fifty times smaller between 2007and 2015) and it will be possible to storeeverything that we hear, see, say and do.

In Europe the information carried byoperators multiplied six fold in the period2002-07 and has reached 16 Exabytes(1 Exabyte = 1,000 million Gigabytes)7.

...and that communicationservices will be ever moreessential...

Electronic mail is an essential work tool formost people. Young people, however, preferinstant messaging and social networks.Nearly all of us require rapid and simpleaccess to search engines as well as Internetapplications to cover our information needs.

For many users it is natural to have access and listen to any version of any song that has ever been composed, instantly.Television is also evolving thanks to new ICT applications and services. Not only high definition and 3D television, but also personalised TV by which users who are connected will also be able tocontact each other.

Current panorama. ICT at the core of the solution


...education

The options to develop business modelsbased on ICT for education and the socialimpact that this involves are evident. Thefollowing data shows this:

• In Nordic countries, 90% of educationalcentres have a Broadband Internetconnection. On the other hand, Greece, Poland, Cyprus and Lithuania have the lowest penetration of theEuropean Union 25 (less than half of the average 70%)8.

• The European average is 1 computer forevery 9 students. In Denmark, Holland,the United Kingdom and Luxembourg 4or 5 students share a computer; and inLatvia, Lithuania, Poland, Portugal andGreece each computer is shared by 17students8.

• 74% of the 4,475,000 European teachershave used ICT in the classroom over thepast year. In Lithuania and Greece this is around 35% of teachers, while theUnited Kingdom has a use of 96% andDenmark has 95%8.

• Between 2009 and 2010 there will be aninvestment of 69 billion euros in digitallibraries in the European Unions9.

Thanks to ICT, teachers do not need tophysically be with their students, creatingopportunities for rural areas.

E-learning favours personalised teaching.Also ICT are aids so that the concept of‘Long Life Learning’ (LLL) can become ever more established.

...health

E-health, defined as the application of ICT to public healthcare, is an instrument thatcan help to provide a better quality of carefor sick people and greater efficiency inpublic health systems.

The global e-health market is estimated as having a potential value of 60 billioneuros, of which a third would correspond to Europe. With these figures, e-health canbe considered as the third largest medicalindustry in Europe, after pharmaceuticals(205 billion euros) and medical equipment(64 billion euros). The potential of businesswith social impact is enormous10.

Telemedicine, telemonitoring,videoassistance, remote patient care anddistance learning for doctors and patientsare instruments that could be used toimprove the efficiency of medical careprocesses. Also, appropriate use of ICT willprovide greater coverage, better interactionbetween doctors and patients and bettermanagement of waiting lists.

...environment and climate change

The use of ICT could help to rationalise theconsumption of resources and availableenergy. For example the establishment of new forms of work such as telework,videoconference or electronic invoicingwhich can facilitate the improvement of energy efficiency, and generate energy savings that are equivalent to 0.8% of electrical consumption in the European Union in 2020. This equates to a 0.6% reduction of CO2 emissions for this same year11.

ICT contribute to approximately 2% ofGreenhouse Gas Emissions, but theirservices could save in other sectors at least 5 times this 2%. Specifically theycould reduce up to 15% of world emissions,which are estimated to be produced in2020, thus becoming part of the climatechange solution. This energy efficiencywould transform into economic savingsthat could reach 600 billion euros12.


However, the company still has some challenges left to tackle, which ICT could help to solve...

1 http://www.itu.int/itunews/manager/display.asp?lang=en&year=2008&issue=10&ipage=30&ext=html2 Yankee Group – Global Connected View Activity Forecast. Diciembre 20083 Yankee Group. Link data Asia-Pacific Conneted View Forescast. 20094 Informe ‘La Sociedad de la Información en España 2008’. Colección Fundación Telefónica / Ariel 5 http://www.elpais.com/articulo/portada/REDES/SOCIALES/GUERRA/elppor/20080822elptenpor_2/Tes6 http://en.wikipedia.org/wiki/demographics_of_the_internet7 Company estimates8 http://www.n-economia.com/notas_alerta/pdf/ALERTA_NE_02-2008.PDF9 http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1747&format=HTML&aged=0&language=

EN&guiLanguage=en10 UE. Speech. Viviane Reding. http://ec.europa.eu/information_society/activities/health/docs/events/whit2008/

whit2008-reding-speech.pdf11 Impacts of Information and Communication Technologies on Energy Efficiency EU, 2008.12 SMART 2020 report.

The ICT sector is experiencing an intensive and constant transformation...

...digital inclusion

In 2020, one in four Europeans will be over 65. In 2050, it is expected that therewill be 2,000 million people in the worldover the age of 60. At the current rate andwithin a generation, the number of peopleof retirement age and dependent on their pensions will exceed the number of young people2.

Migratory movements are changing thepopulation make-up. In 2006, the numberof people of foreign origin constituted 12% of the total population of the OECDcountries. It is significant though that, after a period of five years, between 20%and 50% of immigrants return to theircountries of origin3.

About 10% of the world population sufferssome sort of disability. If the families ofthose afflicted with disabilities are takeninto consideration, the number of peopleaffected worldwide is 2,000 million, i.e.almost one in three4.

For older people, the disabled and all those at risk of exclusion, the help that ICT can give them, can in many cases mean the difference between working andnot working; being able to communicatewith friends and family members or being isolated, receiving medical assistancewithout leaving the house or not having it; in short, being a dependent or anindependent people.

Barriers are falling and new opportunities emerging

Globally revenue in the ICT sector grew4.8% in 2008. In Europe, the sectorcontributes to 6% of employment, accounts for 8% of GDP and generates 25%of its growth5. In Latin America investmentsin the ICT sector have contributed to nearly20% of the economic growth in the region, with a growing trend over the last few years6.

ICT are contained with in a sector that is in constant evolution. Barriers within thesector are falling: internet companies,content generators, software and hardwarecompanies, telecommunications operators...coincide with one or more of their productsat one or more points on the value chain. In some cases, they collaborate andelsewhere, they compete.

New technology and innovative businessmodels appear frequently. Some of themwill probably change the current scenario.Thus, for example, many analysts of thesector agree on the fact that informationtechnologies will transform into animmense cloud, that is accessible from any place: it is cloud computing.

Thanks to cloud computing the computingpower of computers will be decentralisedvia a large network that is accessible fromthe Internet over the whole planet. But notonly computing power will be distributed;services, applications and infrastructureswill also be distributed. They will be utilisedwhere people need them and only what isneeded will be used. The success of its

establishment will ensure that people are able to work more efficiently and that companies are more productive.

Currently, the Internet mainly connectspeople and computers. However, each timethere are more and more things connectedto the Net: electrical appliances, cars,houses, music players, photo and videocameras, sensors of all kinds etc. Soon therewill be billions of devices connected to theInternet. It is the Internet of Things thatbrings with it new challenges and greatopportunities for ICT.

So many people and things connected tothe internet; such a wealth of informationand digital content available in an instant;so many possibilities to buy and sellproducts and services on the Internet... Never until now has the user had so many possibilities so close. This is why thepersonalisation of services and offers of allkinds will make the difference. Users areking more than ever before and they aredemanding a full and personal experienceof service and quality products that aredifferentiated from the competition.

Current panorama. ICT at the core of the solution


In Europe, 20% of investment in R+D and 40% of productivity growth come from ICT sector companies.

ICT are an agent of socio-economic change

ICT are an agent of socio-economic progress

Information and CommunicationTechnologies are a driving force for thesocio-economic progress of countries. They help to improve productivity andcompetition of companies and as suchcontributed to economic growth.

At the current time of the global creditcrisis, the ITC sector shows a morefavourable performance than other sectors.According to the IDC consultancy in 2009,global investment in technology will growby 2.9% and Gartner Inc. estimates that thesale of mobile telephones will grow by 6%7.The results of a study presented byTelefónica indicate that at times of crisis,spend on telecommunications is lessaffected than other sectors8.

There are two main reasons for which inthis period, the ICT sector is better off than others. In the first place it should beremembered that ICT continue to evolveand incorporate innovation at a greaterspeed than other sectors: newtechnologies appear, prices of services and devices decrease, new countries andemerging markets join in, etc. In thesecond place, both the public and privatesectors assume that the use of the ICTprovides a stimulus for the improvementof productivity and as a consequenceeconomic growth7.

Important investments in infrastructuresbeing carried out by companies in the ICTsector have a direct impact in GDP growth

of countries and the generation ofemployment, which is an important lever for the creation of a production model thatis more efficient, and therefore acceleratethe economic recovery9.

All this generates a series of opportunitiesin the different markets that companies inthe sector are able to cultivate.

Consumers are looking for confidence andvalue in the services being offered to them,companies need to increase theirproductivity to continue to be competitive,and public authorities have to improve theirefficiency and the use of ICT in sectors suchas Health, Education and Justice.


The ICT sector... ...and its potential

Economy

Health

Education

Climate change

Disabilities

Inclusion

Government - regulation

• Market worth 2.9 billion euros worldwide in 2008• 8% of GDP and 40% of the increase in productivity in the EU• Employing 13 million people in the EU, 6% of the total• 25% of the total amount invested in R+D in the EU

• E-health is one of Europe's major industries, the third largest in the sectorbehind the pharmaceutical sector (205 billion euros) and the medicalequipment sector (64 billion euros)

• The EU average is one computer per nine pupils• 74% of teachers in Europe have used ICT during class time• By 2010, 69 million euros will have been invested in digital

libraries in the EU

• ICT represent 2% of global emissions. OK

• There are about 650 million people with disabilities worldwide• Less than 5% of public sector websites are accessible• 10% of the world population suffers some sort of disability

• 16% of the population in Europe is over 65

• Public procurement, using conventional procurement systems, amountsto 16% of GDP in the EU

• Making ICT services universally available in emerging economies will createtwo billion potential customers

• The e-Health market is potentially worth 60 billion euros

• The EU will soon attain a penetration rate close to one hundred percent in Broadband in the education sector

• Investments in digital libraries continue to grow• New programmes are being created to facilitate and promote

the access of teachers to ICT

• The ICT sector has the potential of reducing worldwide CO2 emissions by 15% in 2020

• The energy efficiency obtainable by employing ICT represents savings of approximately 600 billion euros

• Remote care services will increase fourfold by 2050

• In 2020, one in every four Europeans will be over 65 years old and the consumption capacity of this age group will have multiplied

• ICT are crucial when it comes to electronic invoicing within the public sector. Its use will give rise to estimated savings of approximately300 billion euros.

1 EC i2010 annual report for 2007. DG Information Society. European Commission.2 http://www.etno.be/Portals/34/ETNO%20Documents/Sustainability/Telefonica_ageing.pdf3 ‘A sustainable future in our hands’. European Commisison. November 2007.4 http://portal.unesco.org/ci/en/ev.php-URL_ID=26751&URL_DO=DO_TOPIC&URL_SECTION=201.html5 EITO and IDATE - Jan 096 http://www.itu.int/itu-d/opb/ind/D-IND-WTDR-2006-SUM-PDF-E.pdf7 The Global Information Technology Report 2008-20098 IV Directors Summit. Madrid, March 2009 9 LEGG for ETNO and MICUS for EC.

Telefónica, better placed than ever

22 For its economic impactCustomers* 22

Satisfaction index 23

Share value 24

Results 26

Products and services 28

Innovation 30

Infrastructures 32

34 For its social impact*Employees 34

Employee Satisfaction Index 35

Suppliers 36

Digital inclusion 38

Driving force of progress 40

Business principles 42

Social and cultural action 44

46 For its environmental impact*Climate change 46

* These chapters in detail can be found in the 2008 CSR Annual Report. Likewise, referred information on social andcultural action developed by Fundación Telefónica can be found on their Annual Report.

Its extensive commercial activities allowed it to increase the number of accesses by 30 million, equivalent to a year-on-year increase of 13.2%, thanks to advances obtained in mobile telephony (+16.6%), Broadband (+20.9%) and pay TV (+29.7%).

When considered in terms of geographical areas, the increasing contribution of TelefónicaLatinoamérica with over 158 million accesses at the end of 2008 (a year-on-year increase of 18%) is what stands out most; along with the competitive strength of Telefónica España(+2%) with 47.3 million accesses and Telefónica Europe with 45.8 million (+9%).

This figure reflects the properdiversification of the business.

It is 3.8 times larger than in 2000

Telefónica ended 2008 with 259 million customer accesses, the leading integratedoperator in terms of growth

Customers


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The number of mobile telephony accesses ofTelefónica Group had almost reached 196million at the end of 2008, an increase of 16.6%:

• The number of mobile accesses forTelefónica España was over 23.6 million,an increase of 3.4%, mainly based on the growth of contract lines.

• Latin America notched up a figure of 123.4million mobile accesses, a year-on-yearincrease of 22.7% (+18.1% organic1) thanksto advances in all business operations.

• In Europe, the Company achieved a figureof 41.2 million lines, an increase of 7.6%.The net increase of 1.7 million customersin Germany stands out.

Fixed telephony

In the mature market of fixed telephony,Telefónica ended 2008 with 42.9 millionaccesses as opposed to 43.4 million in 2007:

• In Spain, the number of accesses was over 15.3 million at the end of 2008, a fall of 3.7%; however, 83% of the losses infixed lines correspond to migrations towholesale lines which, naturally, continueto generate revenues for the Company.

• In Latin America, the number of accesseswas 25.6 million at the end of the year, an increase of 1.0%. The fixed-wirelessjoint project in Peru and the growth in the number of fixed wireless accesses inVenezuela are both worthy of mention.

• In the Czech Republic, the number ofaccesses at the end of 2008 was 1.9 million,representing a year-on-year drop of 8.3%.

Broadband

At the end of 2008, the number of retailaccesses to the Internet via Broadbandapproached 12.5 million with a year-on-yeargrowth of almost 21%, spurred by bundledvoice, ADSL and pay TV services:

• In Spain, Telefónica ended the businessyear with 5.2 million accesses, an increase of 13.7%.

• In Latin America, the number of accessesexceeded 6 million, an increase of 20.5%.

• In Europe accesses increased by 72.9%, upto 1.2 million, split between Germany, theUnited Kingdom and the Czech Republic.

Pay TV

At the end of 2008, accesses to pay TVexceeded 2.3 million representing anincrease of 29.7%:

• Telefónica España won 101,407 newcustomers during the last business year,taking the total to 612,494 customers(+19.8% year-on-year).

• In Latin America, the Company achieved a figure of 1.5 million customers in Peru,Chile, Colombia, Brazil and Venezuela asopposed to 1.2 million in December 2007.

• Telefónica O2 Czech Republic reached a total of 114,496 customers.

1 Includes Telemig accesses in December 2007.

Note: For a detailed analysis of the financial statements of the Telefónica Group, please refer to the audited informationcontained in the annual statements.

Telefónica Group: evolution of accessesJanuary - December

Unaudited data (per thousand) 2008 2007 % variation

Final customer accesses 255,451.4 226,119.4 13.0

Fixed telephony accesses142,930.8 43,433.6 (1.2)

Internet and data accesses 14,654.3 13.156.6 11.4

Mobile accesses2195,598.9 167,781.1 16.6

Pay TV 2,267.5 1,748.1 29.7

Wholesale accesses 3,433.0 2,624.2 30.8

Total accesses 258,884.4 228,743.6 13.2

1 RTB (including TUP) x1; Basic Access RDSI x1; Primary Access RDSI Digital Accesses 2/6 x30. Including personal use. Includes all 'fixed wireless' accesses.

2 Since April 2008 includes customers from Telemig.

Note: from 1 January 2008, TUPs with wireless technology are included in the 'fixed wireless' category within fixed telephony accesses.

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Telefónica Europe achieved 7.50 points;and the greatest increase in the Group,

7.7%, was seen in Latin America

Customer satisfaction in 2008 reached 6.921

points compared to 6.772 the previous year

The Company worked to improve the management of complaints and telephone support amongst other aspects.

It is predicted that this figure will rise to 7.243 in 2009 by means of local plans inspired by the 'Customer Experience' methodology.

...customer satisfaction

In 2008 at the close of the fourth quarter,the Telefónica global Customer SatisfactionIndex (CSI) reached 6.92 out of 10 points as opposed to 6.77 in 2007.

The evolution of this indicator, whichrepresents the degree of satisfaction of userswith the Company in general and is relatedboth to their expectations and to their idealcompany image, was closely monitored bythe Quality and Customer Service Committeeof Telefónica S.A., a consultation committeeattached to the Board of Directors.

The improvement in the CustomerSatisfaction Index (CSI) is the result of thequality control plans implemented by eachcompany within the Group. Once again as inprevious years, the reference methodology was'Experiencia Cliente' (Customer Experience).This methodology, which has beensuccessfully applied in Europe for many years, is used as a basis by different countriesfrom other regions for designing their own improvement programmes, whichare naturally adapted to take into account particular local needs.

Priorities

In general and in addition to launching newproducts and attractive tariffs, Telefónicasought to improve aspects which areconsidered as priorities by customers such as the customer support providedthrough different channels and thereduction in and management ofcomplaints related above all to invoicing.The constant modernization and extensionof networks was another priority in variouscountries. The number of faults per 100lines4 stood at 4.6 at the end of 2008.

The common objective of all the localquality plans was to achieve progressdirected towards winning or consolidatingthe leadership of the Company vis-à-vis its customers, and in so doing, obtain a better Customer Satisfaction Index than its competitors.

In fact, Telefónica ended 2008 as leader in the mobile telephony markets in Ecuador,Spain, Mexico, Nicaragua, United Kingdomand Uruguay.

Regional evolution

The Customer Satisfaction Index ofTelefónica España in 2008 stood at 6.32. The index as evaluated by Major Customersevolved favourably (6.35) and in addition, its position in wireless telephony faredbetter than its competitors.

Evolution of globalcustomer satisfaction*

2008 6.921

2007 6.772

* Scale of 0 to 10 where 0 means not at all satisfied and10 means completely satisfied.

Exchanging betterpractices

In 2008 Telefónica took advantage ofCommercial Wings (CW), the programmefor the exchange of commercial andmarketing knowledge participated in by 5,400 users, with the objective ofpromoting interregional collaboration and improving the experience of users,amongst other aspects. This was one of the subjects dealt with in its more than 65 communities of experts and will receivemore attention in 2009. The CustomerDefence Service of Telefónica España or the online channel in the United Kingdom,(www.o2.co.uk) are just two examples of experiences that could be shared.

1 The target does not include Vivo. With Vivo, it rises to 6.97.2 The global ISC data from 2007 has been adjusted as a consequence of the homogenisation of the measurement

methodology over the whole Group. This project allowed us to unify the scale and questions in relation to satisfaction,amongst other aspects. The unadjusted ISC for 2007 was 6.84

3. The target does not include Vivo. With Vivo it rises to 7.274. Includes fixed lines and ADSL for Spain, Argentina, Brazil, Chile, Columbia and Peru.5. The data does not include Vivo. With Vivo it rises to 7.276. The data does not include Vivo. With Vivo it rises to 8.01

Telefónica Latinamérica also continued toprogress in terms of customer satisfaction.The Customer Satisfaction Index went from6.62 in 2007 to 7.135 in 2008 thanks to thebetter showing of the index in the fixed and mobile telephony business sectors,attaining scores of 7.966 and 6.24 respectively.

In turn, Telefónica Europe continued toimprove its degree of customer satisfaction: itattained an index of 7.50 as opposed to 7.37 in2007. Once again this year, mention should bemade of Telefónica O2 United Kingdom whichended the business year as the company that was best rated by users in a marketcharacterised by its extreme competitiveness.

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At the end of 2008, Telefónica occupied the fourth place amongst

telecommunications operators in terms of market capitalization

Profit per share rose by 41.4%1, reaching 1.63 euros

The Company confirms its commitment to prioritise shareholder return when consideringhow to use the cash flow generated and to gradually increase the dividend per share.

The Board of Directors, in their meeting of the 29th of April 2009, reiterated thecommitment they announced in January to raise the dividend for the 2009 financial year, up to 1.15 euros per share, the payment of which will be split into two parts. The proposed dividend assumes a year-on-year increase of 15%.

Shareholder remuneration

Telefónica maintained its commitment togradually increase the dividend per share.69% of the cash flow generated in the 2008 business year was set aside forshareholders, which represents 10% of the Company's market2 capitalization.

This remuneration was achieved by acombination of paying out dividends andrepurchasing its own shares (126.7 millionshares for the whole of the 2008 businessyear). In this respect, it is worth pointing out that on 31st March 2009 the Companycompleted the repurchase programme thatwas put in motion in February 2008, for a total amount of 150 million shares.

Payment of dividends in 2008• On 13th May 2008, the Company paid out

an extra dividend, financed by the profitsof 2007, worth 0.40 euros gross per share, which was added to the dividendof 0.35 euros gross per share paid out on 14th November 2007.

• Likewise, a dividend financed by theprofits earned in the 2008 business yearwas paid out on 12 November 2008amounting to 0.50 euros gross per share.This dividend was completed with thepayment on the 12th of May 2009, of 0.50 euros gross per share from the 2009profits. With these two payments, theCompany has fulfilled the commitmentannounced to remunerate theshareholder with a 1 euro dividend per share before the end of the firstquarter of 2009.

Policy on dividends improvementsThe Company Board of Directors, in theirmeeting of 29th April 2009, reiterated thecommitment they announced in January to increase the dividend up to 1.15 euros per share for the 2009 financial year, thepayment of which will be divided into twoparts. The dividend that has been proposedwould entail a year-on-year increase of 15%.

In this regard, the Board of Directors hasproposed to the next Shareholders General

Meeting, the distribution of a dividendcharged to unrestricted reserves for a fixed amount of 0.50 euros gross per share, in the second quarter of 2009.

Since Telefónica reinstated its dividendpolicy in 2003, it has progressively improved its shareholder remunerationpolicy and is now one of the best companies in this regard aspect.

Shareholder profit

In 2008, Telefónica obtained net profits of 7,592 million euros with a year-on-yearincrease of 38% on a comparative basis1.Similarly, the net basic profit per share was 1.63 euros, 41.4% higher than 2007 in comparable terms1.

The Company maintains its objective of attaining a Net Profit per Share (NPS) of 2.304 euros and Cash Flow per Share (CFS) of 2.87 euros in 2010.

If an analysis were carried out examiningsensitivity to changes in the operatingclimate and assuming an extreme scenariofor the Company in 2010 (extrapolating the sharp depreciation of some currencieswith respect to the euro and the currentdeterioration in the economic climate), the NPS would be at 2.10 euros and the CFS would fall to 2.50 euros.

Evolution of share price

Following five years of consecutiveincreases, Telefónica's share price was notimmune to the negative evolution of theequity markets during the 2008 businessyear and registered a fall of 28.7% duringthe year, taking its value to 15.85 euros per

Share value


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Return per share 2008No. of shares Gross value euros

Value of 100 shares on 1 January 2008 100 2,222

Cash dividend (13 May 2008) 100 40

Cash dividend (12 November 2008) 100 50

Value of 100 shares on 1 January 2009 100 1,585

Total value of a portfolio consisting of 100 shares 1,675

Return -24.62%

1 Excludes the impact of the sale of assets (Airwave, Endemo and Sogecable) in both periods and the participation of the Telefónica Group in the restructuring carried out in turn by Telco, S.p.A. for its participation in Telecom Italia.

2 Effective date, 25/02/09.

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share. Nevertheless, the Company'sdifferential profile was reflected in its better performance when compared to its reference sector in Europe (DJ StoxxTelecommunications -37.0%) and thegeneral indices Ibex-35 and Eurostoxx-50 (-39.4% and -44.3% respectively).

In relative terms, Telefónica also fared better than the other European operatorsTelecom Italia (-45.9%) and PortugalTelecom (-32.0%) and its evolution wassimilar to those of Vodafone (-26.0%) and Deutsche Telekom (-28.4%).

The main reason for the fall in the price of Telefónica shares was the negativeevolution of the equity markets in general,since the company's high liquidity and itsconsiderable weight in the benchmarkindices such as the Ibex-35 or the Eurostoxx-50 meant that Telefónica wasparticularly affected by the flight of capitalfrom the equity markets. Other factorsaffecting the share price were the negative sentiment of investors withregards to the evolution of the Spanisheconomy and the negative evolution of some Latin-American currencies.

Despite this, Telefónica performed better in 2008 than the main indices thanks bothto the solid quarterly results it publishedthroughout the business year and to thefact that it was perceived as a defensive

stock because of its growth profile, its solid financial situation, its very selectiveexpansion strategy and its extremelyattractive shareholder remuneration policy.

In this context, Telefónica closed the 2009 business year with a marketcapitalization of 74,574 million euros,coming in fourth amongst the companies in its sector worldwide.


Other data of interest

Stock marketsTelefónica shares are quoted on the Spanishcontinuous market (in the benchmark Ibex-35index) and in four other Spanish stockexchanges (Madrid, Barcelona, Bilbao andValencia) as well as the NYSE, the LSE and theTokyo Stock Exchange plus the Buenos Aires,Sao Paolo and Lima stock exchanges. Theprocess of delisting Telefónica shares from the Paris and Frankfurt stock exchanges,which began in the 2007 business year, wascompleted in the first quarter of 2008.

Share capitalOn 18th July 2008, the Company reduced its share capital by 68,500,000 euros bycancelling 68,500,000 of its treasury shares.

As a result of this, the subscribed and full paid-up share capital amounts to4,704,996.485 euros and is divided up into4,704,996,485 ordinary shares, each of thesame class and series with a nominal value of one euro per share and which are represented by book entries.

Number of shareholders Telefónica had 1.5 million shareholders at 1st April 2008 according to itemised investorregistries for natural or legal people and based on Iberclear (the Spanish securities registration, clearing and settlement system) data.

Significant shareholdingsAccording to the information available tothe Company, there is no natural or legalpeople which, directly or indirectly, by itselfor jointly, either controls or is capable ofcontrolling Telefónica.

The Caja de Ahorros y Pensiones deBarcelona (la Caixa) and the Banco Bilbao Vizcaya Argentaria, S.A. (BBVA)possessed - either directly or indirectly -5.013% and 5.170% of the share capital of Telefónica respectively on 31st December 2008.

117,797

147,334China Mobile

AT&T

Vodafone

Telefónica

Verizon

NTT DoCoMo

NTT

France Telecom

Deutsche Telekom

74,926

74,574

67,534

60,865

56,629

51,971

46,658

Telefónica Ibex-35 DJ Euro Stoxx 50DJ Telco

110

100

90

80

70

60

50

40

01/0

1/0

8

21/0

1/0

8

10

/0

2/0

8

01/0

3/0

8

21/0

3/0

8

10

/0

4/0

8

30

/0

4/0

8

20

/0

5/0

8

09

/0

6/0

8

29

/0

6/0

8

19

/0

7/0

8

08

/0

8/0

8

28

/0

8/0

8

17

/0

9/0

8

07

/10

/0

8

27

/10

/0

8

16

/11/0

8

06

/12

/0

8

26

/12

/0

8

Evolution of share price 2008

Source: Bloomberg

Source: Bloomberg. Data at the end of 2008

The average daily trading volume of Telefónica shares in 2008 on the Spanish continuous market was 57.2 million shares (compared to 61.8 millionshares in 2007).

Ranking of the telecommunications sector by market share capitalization Millions of euros

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Total revenues amounted to 57,946 million euros thanks to proper business diversification

Telefónica fulfilled its objectives for 2008 and obtained a net profit of 7,592 million euros

The Company closed last year with solid results based on the important organic growth of its operations and high management capacity. Another year in which Telefónica maintained its aim of fulfilling its commitments.

Operating cash flow (OIBDA-CapEx) amounted to 14,519 million euros, 20.2% more than in 2007; net financial debt fell 5.6% to 42,733 million euros.

In 2008 Telefónica once again demonstrated superior growth capacitywhen compared to its main rivals. Itachieved this thanks to the diversifiedprofile it has built up over this decade.

Revenues1

The expansion in its customer base and the initiatives designed to encourageconsumption allowed the Company toobtain total revenues of 57,946 millioneuros in the 2008 business year, a year-on-year increase of 2.7%. This growthwas affected negatively by exchange ratesand by changes in consolidation scope,which reduced the final figure by 3 and 1.2 percentage points respectively.

In organic terms minus capital gains2,revenues rose by 6.9% mainly due to: thestrong growth of Telefónica Latinoamérica,which contributed 4.6 percentage pointsand, to a lesser degree, for TelefónicaEurope, which contributed 1.5 percentagepoints during the period. When theCompany's activities are examinedindividually, the revenues generated by the mobile business, with an increasingcontribution from data, Broadband and payTV, stood out as the main driving forcesbehind the organic growth in revenues.

In terms of regions, total revenues fromTelefónica Latinoamérica were responsiblefor 38.3% of the Group's total revenues and the figures for Telefónica España and Telefónica Europe were 36.0% and24.7% respectively.

Profitability of thebusiness1

The positive evolution of revenues togetherwith cost containment were reflected in the evolution of operating revenue beforedepreciation and amortization (OIBDA)which increased 0.4% with respect to 2007, reaching 22,919 million euros for the whole of 2008.

In organic terms minus capital gains2, OIBDA increased by 14.7% while the OIBDA margin had climbed to 38.7% at the end of 2008, reflecting improvements in efficiency and economies of scale, all within a business environmentcharacterised by the Group's high level of commercial activities and thetransformation of the fixed telephonybusiness in Latin America.

On a region-by-region basis, the OIBDA ofTelefónica España represents almost 45 % of the Group's total OIBDA as compared to36.8% for Telefónica Latinoamérica and18.2% for Telefónica Europe.

Cash generation1

The efforts made by the Company inmanaging operating costs and investmentswere borne out in a significant increase in operating cash flow (OIBDA-CapEx) which stood at 14,519 million euros at theend of last year and which represents ayear-on-year increase of 20.2% in organicterms minus capital gains2. Consideringeach region separately, Telefónica Españacontributed 8,077 million euros; TelefónicaLatinoamérica 4,410 million euros; andTelefónica Europe, 2,108 million euros.

The cash flow generated in 2008 amountedto 9,145 million euros, of which 2,224 millioneuros were set aside for buying up treasuryshares, 4,165 million euros were used todistribute Telefónica S.A. dividends, 920million euros were used to financecommitments undertaken by the Group(consisting mainly of personnel reductionprogrammes) and 1,327 million euros wereearmarked for net financial and propertyinvestments during the period.

This means that net financial debt wasreduced by 508 million euros. In addition,debt also fell by 2,043 million euros due to fluctuations in exchange rates, changesin consolidation scope and other factorsaffecting the financial statements. Thisrepresents a total reduction in debt of 2,551 million euros with respect to the netconsolidated debt at the end of 2007, whichmeans that the net financial debt of theTelefónica Group in December 2008amounted to 42,733 million euros.

Results


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Promises to investors1

Once again this year, Telefónica maintainedits track record of fulfilling its promises. In this respect and despite the currenteconomic climate, the Company fulfilled all its objectives thanks to excellentmanagement and its ability to maximisethe benefits afforded by diversifying its operations.

The Group's strategy for 20093 centres onmaintaining high cash generation in themarkets against the backdrop of a morecomplicated economic scenario while at the same time taking advantage of thegrowth potential in expanding markets. In particular, Telefónica predicts:

• A year-on-year increase in consolidatedoperating cash flow (OIBDA-CapEx): 8% / 11%.

• A year-on year increase in consolidatedOIBDA: 1% / 3%.

• An increase in consolidated revenues.

• Investment below 7,500 million euros.

Similarly, the Company confirmed the following objectives for 20104:

• Net profit per share: 2.304 euros (NPS).

• Cash flow per share: 2.87 euros (CFS).


1 For a detailed analysis of the consolidated financial statements of the Telefónica Group, please refer to the auditedinformation contained in the annual financial statements.

2 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and of Telemig inApril-December 2007. The consolidations of Airwave in January-March 2007 and of Endemol in January-June 2007 havebeen excluded. Revenues include the impact on Telefónica España deriving from the new business model of the publicvoice telephony service (-147.4 million euros in 2007). The OIBDA excludes the effects of the sale of assets (Airwave,Endemol and Sogecable) in both periods.

3 The base figures for 2008 exclude the effects of the sale of assets (143 million euros in capital gains deriving from the saleof Sogecable and 174 million euros set aside in provisions to meet possible obligations deriving from the disposal of shareparticipations in the past, since these risks have in the meantime either disappeared or failed to transpire) and includes 9months of consolidation of Telemig. The 2009 base for guidance assume constant exchange rates for 2008 (averageduring 2008). For the purposes of calculating guidance, the OIBDA excludes capital gains and losses stemming from thesale of companies and restructuring of companies. The CapEx of the Telefónica Group excludes the Real Estate EfficiencyProgrammes and investments in prospect. The base for the financial objectives: operating cash flow (OIBDA-CapEx): € 14,201 M; consolidated: € 22,602 M; consolidated revenues: € 57,946 M; CapEx consolidated: € 8,401 M.

4 If an analysis were carried out examining sensitivity to changes in the operating climate, the BPA would be 2.10 euros and the FCFA, 2.50 euros.

Telefónica Group: results per business unitNon-audited data (per million euros) Net turnover OIBDA Operating resultJanuary - December 2008 2007 % Var 2008 2007 % Var 2008 2007 % Var

Telefónica España1

20,838 20,683 0.7 10,285 9,448 8.9 8,046 7,067 13.9

Telefónica Latinoamérica2

22,174 20,078 10.4 8,445 7,121 18.6 4,800 3,562 34.8

Telefónica Europe3

14,308 14,458 (1.0) 4,180 4,977 (16.0) 1,144 1,591 (28.1)

Other companies4

625 1,221 (48.8) 9 1,278 (99.3) (117) 1,168 c.s.

Total Group1 2 3 4

57,946 56,441 2.7 22,919 22,825 0.4 13,873 13,388 3.6

Notes:OIBDA and OI figures include management costs and those arising from the use of the trademark.

1 The figures for 2008 reflect the new model that applies to public use telephony service (net revenues). The data for 2007 has not varied with respect to what was originally published (net revenues and expenses) and consequently, the figures for variation of 2008 with respect to 2007 are not homogeneous comparisons.

2 From April 2008, the consolidation scope of Vivo includes Telemig.3 From the second quarter of 2007 onwards, Airwave is no longer included within the consolidation scope (the sale of Airwave generated capital gains of 1,296 million euros, which

were recorded in the second quarter of 2007). The 2008 figures include 174 million euros in provisions originally set aside to meet possible obligations arising from the disposal of share participations in the past, since these risks have in the meantime either disappeared or not come to fruition.

4 From the third quarter of 2007 onwards, Endemol is no longer included within the consolidation scope (the sale of Endemol generated capital gains of 1,368 million euros). The second quarter of 2008 includes the capital gains corresponding to the sale of the share participation in Sogecable (143 million euros).

OIBDA distribution per segment

SpainLatin AmericaEurope

45%

18%

37%

Revenue distribution per segment

SpainLatin AmericaEuropeOther companies

36%

25%

1%

38%

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These pages contain just a sample of 2008’s new offers

In 2008, Telefónica launched the first service for itsoptical fibre network, launched a multi-device socialnetwork and made new wireless solutions available...These were just some of the products and services launched by the Company in a year that was marked by its exclusive right to market advanced mobile phones.

Optical fibre

In 2008, Futura was the name given byTelefónica to the new optical fibre networkwhich is now being rolled out in Spain, andfor which investments will exceed 1,000million euros up to 2010. The newinformation highway offers transmissionspeeds of 30 Mb and is capable of attainingspeeds of up to 100 Mb. Thanks to Futura,the whole range of advanced services, bothfixed and wireless, of the InformationSociety will become available to Spanishhomes, including home automationsolutions and up to two simultaneous high definition television signals.

Trío FuturaTrío Futura is the 3-Play service (telephone,internet and television) offered by Telefónicaover the above mentioned network, withnavigation speeds of up to 30 Mb, advancedtelevision functions, integral maintenanceand flat-rate voice services.

Wireless Broadband

Response to EmployeesIn 2008, Telefónica incorporated mobileconnectivity into 'Response to Employees’. This product was designed to meet integralmanagement needs of ICT used by small andmedium-sized companies and professionals.This connectivity solution makes it possible to work and access the Internet from anylocation and at any moment using Telefónica's3G technologies. At present, over two millionworkstations in Spain are managed by theCompany through 'Response to Employees'.

ASUS EeePCLast year, Telefónica launched an exclusivecompletely integrated solution allowingaccess to Broadband via the ASUS EeePCcomputer, a device especially designed forthose who need mobile working.

Social networks

KetekeIn 2008, Telefónica launched Keteke in Spain, a social network with a high multimediacontent that facilitates entertainment foryoung people and allows them to interactwith one another. This new community is

characterised by the fact that it is a multi-devicesocial network: users can access and interactwith one another using a computer, theirmobile phone or a television, via Imagenio.

FacebookTelefónica concluded a global agreement withFacebook to incorporate direct access to theutility using its mobile portals. The agreementenables mobile Telefónica users to maintaincontact with their friends via Facebook and toparticipate in one or several social networksaccording to their interests.

New handsets

iPhoneTM

In 2008, Telefónica exclusively launched the iPhone™ 3G in 16 European and LatinAmerican countries. The iPhone™ 3Gcombines all the advantages of the firstgeneration iPhone™ with high-speed accessvia Telefónica mobile Broadband employing3G-HSDPA technology and includes a GPS.

Products and services


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Trio Futura has a specific web address www.triofutura.es The keteke social network, www.keteke.com

iPhoneTM 3G by Apple®.

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The Company also exclusively marketed the Nokia N78 on the Spanish market,allowing customers to access the Internet thanks to OVI, the Nokia portal for Internetservices for mobiles.

Other important launches were those of the mobile with the largest screen on themarket, the HTC Touch HD; the Blackberry Pearl Flip, the first folding device; or theecological Nokia 3110 Evolve, a phone withbiological cases that have been manufacturedusing 50% of renewable materials. They werealso the first in Spain to market the Nokia5800 XpressMusic to popularise access totouch screens and music.

Television

Imagenio 3DOver the past few years, Telefónica has been developing Spain's first ADSLtelevision platform: Imagenio. At present,the Company is continuing its work withthe new technologies that will permit it tooffer the next generation of services: 3Dtelevision. In 2008, Telefónica developed a prototype of an on-demand 3D videoplatform for Imagenio. This prototype is compatible with Imagenio's currentcharacteristics and incorporates anautostereoscopic display that allows the user to experience 3D.

Terra TV and Mobile TV

Following an agreement reached with theInternational Olympic Committee (IOC),Terra became the only portal in 2008 withthe exclusive right to transmit the OlympicGames over the Internet and via cell phonein Latin America. In total, over 300 hourswere transmitted from all competitionswith 24-hour coverage, including the bestmoments, photos in real time, videos, news, etc. Terra TV used the multibitratetechnology, which adapts the quality of videos to the bandwidth and speedavailable on the user's connection.

In 2008, Terra TV expanded its presence to19 countries (Spain, Latin America and theUSA) and reached the figure of 58 millionindividual visitors per month, becoming oneof the first portals in Latin America withmore than 8 million users. In addition,television via mobile phone (Mobile TV) was launched in over 15 countries andagreements were concluded with the main television channels: Fox, MTV and Turner, amongst others.

Business productivity

Deutsche Post World Net, which operatesunder the trademark DHL, and Telefónicasigned a pan-European communicationsagreement in January 2009 under theterms of which Telefónica will provide fixed and mobile voice and data services to 2,400 workplaces in 28 Europeancountries. In so doing, DHL hopes tosubstantially improve the efficiency of itstelecommunications services and save costs.

In 2008, Telefónica and SAP collaboratedwith the objective of offering networksolutions to companies in Spain. Thealliance between the two companies willfacilitate the outsourcing of SAPmanagement system to a data processingcentre, thus reducing infrastructure costsand improving productivity.

New challenges

EducationIn 2008, Telefónica O2 United Kingdom and the company Learning PossibilitiesGroup announced the launch of the LP+ Mobile. This product provides a universal e-learning service through mobiles for schools in the United Kingdom. Amongst its features, the product offers unlimited connectivity to Internet and to the distance-learning platform LP, electronic mail and messaging services and collaboration tools.

During 2008, Telefónica and Microsoftjoined forces with the aim of developingdistance-learning applications for teachersand students from Latin America. Thisagreement will lead to the establishment of an on line learning network providingcontents and services to teachers from Latin America.

HealthIn Spain, the Health Department of theAutonomous Community of Castile andLeón gave Telefónica the task of automatingthe primary health care appointmentssystem. From now on, patients will be ableto arrange appointments using differentchannels: telephone, SMS and Internet.

USP Hospitals and Telefónica signed astrategic alliance to cooperate in thedevelopment of eHealth, telemedicine and teleradiology solutions.

GovernmentIn 2008, the Royal Spanish Mint (FNMT)signed an agreement with Telefónica tolaunch the mobile digital signature serviceonto the market. The combination of thenew mobile digital certificates provided bythe Royal Spanish Mint together with thenew secure encryption cards produced byMovistar guarantee a signature that is both legally valid and indecipherable. This means that Telefónica is now able to offer a comprehensive range of electronic signature services on the Spanish market that operate both on fixed and mobile networks.


Image from the Movistar Christmas campaign

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The Company increased its investment in R+D by 12.5%

In 2008, Telefónica committed itself to the use ofinnovation as a driving force for transformationby investing 4,614 million euros1

The Company did work ‘opening’ collaboration models and creating one of the largest networks for innovation within the global ICT sector.

Telefónica's scientific and technological groups continued to define the technologies thatwill revolutionise aspects such as the digital home, communication between people andmachines, the world of Internet, business administration and electronic government.

Information and CommunicationTechnologies (ICT) are a basic instrumentfor promoting economic and socialdevelopment. In this respect, Telefónica isone of the driving forces in the countrieswhere it is present.

Developing new R+D+I capacities

Telefónica, conscious of the fact thattechnological innovation is essential indeveloping its business, increased itsinvestment in this area in 2008 by 5%compared to 2007, taking it up to 4,614million euros1.

This investment capacity, which will bemaintained over the next few years, meansthat Telefónica will be in an excellent positionto transform new technologies into innovativeservices for its customers. Taking into accountthat this goal cannot be reached on its own, the Company is working towards

creating one of the largest networks forinnovation within the ICT sector worldwide.

With this objective, various 'OpenInnovation' initiatives were consolidated in2008 which meant the opening up of theCompany's platforms to collaborate withpartners and customers with the aim ofsetting up joint activities:

• Support programmes for technologicalfirms through Telefónica's Risk CapitalFund by acquiring minority shareholdingsin innovative companies such as Loomia.

• Collaboration with Universities onprojects or by promoting these projectsthrough the Telefónica Cátedras.

• Living Labs to receive user feedback while developing services.

• Participation in programmes andtechnological platforms that promote R+D on a national and international scale.

Innovation


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Telefónica R + D + Telefónica S.A. Business Units

Research: 62 million euros Development: 606 million euros Innovation : 3,946 million euros

Total: 4,614 million euros1

Research InnovationDevelopment

Telefónica's open network for innovations

• Innovation in collaboration with leadingcompanies in each sector - highlightingthe agreements with 'internet players'(Facebook, Google, YouTube, MSN, etc.) -and alliances regarding contents (e.g. the transmission of minority sportsduring the Beijing Olympics).

New proposals were added to theseinitiatives in 2008 as part of the strategic plan to develop services with other players such as the free software platform Morfeo or two newproposals within Movilforum:

• Open Movilforum: a new community ofdevelopers of mobile applications - 900at present - who can try their ideas usingTelefónica's services.

• Movilforum-Apple: the first time thatApple collaborates with an operator tomake available to companies, Apple’splatforms and technologies. At present,about 200 products are being adapted for use with the iPhone.

• Applied research activities • Participation in public R+D programs

and in technological platforms• Collaboration with Universities

• Development of new products & services• Living Labs• Collaboration with leading companies

• Launch of new products & services• Corporate Innovation: Capital Risk;

Program of Corporate Innovation;Employee ideas and strategic alliances

• Purchase of technology

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TPlans were also implemented to takeadvantage of the internal potential ofemployees. An example is provided by thefollowing initiatives launched in Spain byHuman Resources with the support of business units:

• Patenta Idealab: an annual awardscheme that rewards individual proposalssubmitted by employees that improveefficiency within the company throughcost reduction or revenue generation.

• Patenta Entrepreneurs held twice a year, which rewards the best package ofinnovative projects capable of identifyingcommercial opportunities that mightrepresent new sources of revenue.

In other regions, other programmes wereimplemented like: ‘Bright Sparks’ in Europe and 'Carrera de Campeones' (Champions Race) and 'Desafío del Emprendedor'(Entrepreneur’s Challenge) in Latin America.

Innovation promoted by the Group's businessoperations

During 2008 Telefónica's business areascontinued coordinating efforts to developinnovation initiatives with a global focus,adapted to regional needs.

Many of these initiatives were aimed atcreating new TV, financial and advertishingservices using mobile telephony; analysingand broadening the possibilities of newBroadband networks, new IPTV services(Imagenio), health applications, etc.

In Spain, the most significant developmentwas Movistar Mobile Media, a pilot servicedeveloped in collaboration with Microsoft,which will allow users to access multimediacontents stored on their personal computersusing their mobile phones (photos, music and video)- amongst many options.

In Telefónica Europe, the most interestingdevelopments concerned trials of wirelesselectronic payment applications (electronicwallet), applications that can be used to pay for theatre, cinema or public transporttickets and electronic identificationapplications (ID documents or electronicdriving licences) that have been carried out


Telefónica R+D

Telefónica Research and Development (TID) isthe Group's main instrument of technologicalinnovation and continues to be the mostimportant private commercial R+Dorganisation in Spain. In 2008, the year of its twentieth anniversary, its activities were valued at over 211 million euros.

In keeping with the 'Open Innovation' modelpreviously mentioned, TID participates inover 200 projects in collaboration withalmost 1,000 organisations, including morethan 150 universities. A Scientific AdvisoryCouncil, made up of people of internationalrenown, helps in defining its strategy.

1 Investment in technological innovation determined using criteria established by the OECD.

Lines of action

'Ultra rapid' Broadbandnetworks

New generation IPnetworks

New access networks(optical fibre)

Wireless connectivity

Platform of services

Networks & platforms

Integrated networkmanagement andservices

Management of opticalfibre networks

Network security

Process optimisation,real-time charging

Service quality

Web 3.0

Evolution of Imagenio

Distribution of P2Pcontents

Wireless wifi

Recommended systems

Multiplatform interfaces

Internet &Multimedia

Recording user feedback

Home automation

Telemedicine

Remote surveillance

Virtual communities

New services forcompanies

Individual, home, enterprise

End user services

4,301

2006

4,384

2007

4,614

2008

Investment intechnologicalinnovation (R+D+l)1

Expressed per million euros

Networkmanagementsystems & businesssupport systems

in the United Kingdom or new Broadbanddevelopments in Germany.

In Argentina, Brazil and Peru, an innovativepilot project was inaugurated calledTECTOTAL, an integral support service for 'Digital Home' (at home installation,maintenance and support provided for anytype of electronic device or for the purposeof resolving any kind of connectivityproblem).

Next year's technological challenges include ultra-rapid networks, telepresence,the Internet of the Future and thedevelopment of more advanced servicesaimed at facilitating the evolution of the information society.

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25% of the Company's capital expenditure was used to maintain

its business activities while 75% was invested in growth

Telefónica rolled out new networks andstrengthened its infrastructures thanks to capital expenditure worth 8,401 million eurosPriorities that should be highlighted the fibre network deployment, the development of wireless broadband and the transformations aimed at increasingefficiency and improving cost structures.

The Company's objective is to continue leading the digital transformation in those countries where it is already present by developing its networks and improving its service coverage.

In 2008, Telefónica continued the task oftransforming its network with the aim ofboth guaranteeing its differential serviceoffer - with an increased role being playedby Broadband and mobile telephone dataservices - as well as ensuring thecommercial rollout of optical fibre in the home.

This meant concentrating on the followingobjectives: exploiting economies of scaleand synergies between Group operators,increasing quality and efficiency whenexecuting projects and reducing the timerequired to launch new services. In order to achieve all this, two key factors wereidentified: transforming networks bothrapidly and as uniformly as possible andstandardising components.

Fixed high-speed access

During 2008, Telefónica continued the drivetowards fixed access via optical fibre usingGPON technology (Gigabit Passive OpticalNetwork), which is a collection of protocolsand standards enabling the deployment ofvoice, data and Internet. In particular anddespite being conditioned by the regulatoryenvironment, pre-commercial rollouts of optical fibre took place in Spain.Developments in other European countriesalso began. This technology, which enablesspeeds of 100 Mbps to be reacheddepending on the customer's configuration,will make it possible to improve the existingcommercial offers Dúo/Trío by incorporatingBroadband and TV services, including HD TV (High Definition Television).

On the other hand, the Company increasedthe coverage of Imagenio in Spain and made it available in other European markets suchas the Czech Republic. The TV services arealso available in fixed telephony operationsin Latin America while Imagenio will be extended alongside the deployment of optical fibre.

Mobile Broadband

Telefónica extended 3G technology in Latin America and Germany in order to offer increased capacity in mobile dataconnections. In addition, it sped updeployment of HSPA technology (whichoffers increased functionality in the 3Gnetwork) throughout Europe, especially inSpain and the United Kingdom. This allowedthe Company to increase its coverage to 75% in Spain, 90% in Ireland, 89% inVenezuela and as much as 91% in Argentina.

4G technologyIn 2008, Telefónica began a detailedevaluation of the opportunities afforded bythe mobile technology 4G, LTE (Long TermEvolution), in collaboration with the mainsuppliers in the sector and through anexchange of experiences with otheroperators. The objective is to carry out thefirst pilot trials in 2009. LTE technologyenables the deployment of a mobileBroadband network that complements the existing network, has a larger capacityand has lower relative costs per user/trafficunit. This means that customers will haveaccess to better functionality and newservices and applications that requirehigher data traffic rates.

'All IP' Network

The Company worked to improve thefunctions offered by its transport network'All IP' (a network that enables allcommunication services to be suppliedusing the IP protocol), with the aim ofincreasing its capacity and allowing it to meet heightened traffic capacityrequirements for services and applicationsof increasing sophistication. At the sametime, the Company concentrated onimproving network resilience andredundancy in order to guarantee service quality and reduce incidents.

IMS Network ControlSystem

Last year, Telefónica implemented IMS(Internet Multimedia Subsystem), which has been operating in Spain since 2005, in the Czech Republic, Mexico, Colombia and Argentina. IMS is an architecturalframework that simplifies network control and facilitates the creation andlaunch of new services by employingstandard protocols.

Intelligence in the network

Apart from carrying out the usual networkanalyses in order to adjust it according to traffic requirements, last year theCompany also began to endow it with moreintelligence, allowing it to 'characterise' itscontents. This will allow the network to bemanaged better, avoid saturation and fraudand identify new business opportunities.

Infrastructures


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'Service Delivery Platform'

In 2008, Telefónica defined thespecifications of the Service DeliveryPlatform (SDP). The platform,implementation of which is due to start on2009, will allow the Company toincorporate any service, either its own orthose provided by other operators, into anyGroup network and operator without theneed for specific developments. This willresult in a broader provision of services.

Digital Home

Last year, Telefónica worked together with industry to find a common solution for standardising gateway interfaces for homes in order to ensure compatibilitybetween the electronic devices usuallyfound in the 'digital home'. In spite of thecomplexities involved, the first productsdesigned for the home and employing this technology will come onto the market in 2009.

More efficient procurementand collaboration

Elsewhere during 2008, Telefónica increased the number of technologyselection processes and drew up a single map of technology suppliers with the aim of rendering procurement processes more efficient.

At the same time, the Company, togetherwith Telefónica R+D and all the operators in the Group, intensified collaboration with other operators such as NTT, Verizon,Telecom Italia and China Unicom and the main suppliers: Microsoft, Intel, NSN,Ericsson, NEC, Huawei, Motorola, Sony...

Looking to the future, Telefónica's mainpriorities are the deployment of opticalfibre, the development of mobile Broadbandand the transformations that will have tobe carried out in order to render itsnetworks as efficient as possible, thusimproving cost efficiency.


Complete mobile coveragein Germany with GSM andmore data speed with 3G(HSUPA)

Since the end of 2008, Telefónica O2Germany's own network covers over 99% of the population1. Thanks to this milestone,the Company is now able to offer itscustomers high-speed voice and dataservices. In the same way, HSDPA coverage,which enables downloads of up to 7.2 Mbit to be obtained, is now availablein almost 100% of the third generationnetwork (3G).

Alongside this, in March 2009, Telefónica O2Germany launched O2 Surfstick, a productbased on HSUPA, the 3G communications

protocol that will enable all users to attainupload speeds of up to 5.76 Mbit - as soon as the existing infrastructure allows this tooccur. This is the first step in the plannedrollout in 2009 of the HSPA+ protocols whichwill enable download speeds of 28 Mbit andupload speeds of 5.76 Mbit.

CapEx by regionsJanuary - December

Unaudited data (millions of euros) 2008 2007 % variation

Telefónica España 2,208 2,381 (7.3)

Telefónica Latinoamérica24,035 3,343 20.7

Telefónica Europe32,072 2,125 (2.5)

Other companies485 178 (52.1)

Total Telefónica Group1 2 3 48,401 8,027 4.7

1 The figures for 2008 take into account the new public voice telephony services business model (net revenues).The figures for 2007 have not changed with respect to what was published originally (gross revenues andexpenses) and therefore the comparison of the changes 2007/2008 is not homogeneous.

2 From April 2008 onwards, the consolidation scope includes Telemig.3 From the second quarter of 2007 onwards, Airwave is no longer included within the consolidation scope (the

sale of Airwave generated capital gains of 1,296 million euros, which were recorded in the second quarter of2007). 2008 includes 174 million euros set aside in provisions to meet possible obligations deriving from thedisposal of share holdings in the past, since these risks have in the meantime either disappeared or failed totranspire).

4 Since the third quarter of 2007, Endemol is no longer included in the consolidation scope (the sale of Endemolgenerated capital gains of 1,368 million euros). The second quarter of 2008 includes the capital gains generatedby the sale of the Company's shareholding in Sogecable (143 million euros).

Note: Capex calculated using accumulated average exchange rates.

Network infrastructures in mobile telephony

Base stations and nodes B-2008 3G 2G

Telefónica España 9,100 14,136

Telefónica Latinoamérica 2,767 18,481

Telefónica Europe 15,840 30,016

Telefónica Group 27,707 62,633

1 Coverage outdoors. 99% of indoor coverage will be reached at the end of March 2009.

The O2 SurfStick, device offering maximum speed withHSDPA technology

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In 2008, the number of employeesworking for the Company increased in 8,500 people

Telefónica directly employs 257,000 people andindirectly employs an additional 330,000 people

Telefónica Latinoamérica experienced the largest increase in employee numbers, 5.3%, and it now accounts for 67% of the total. Spain is the second region in terms of headcountnumbers with 20% while Europe represents 11%.

Partner companies involved in installing and maintaining public telephone equipment and in the provision and maintenance of telecommunications products and services account for the indirect job numbers.

At the end of 2008, 257,000 people were employed by the Telefónica Group, an increase of 3.4% with respect to the previous year. Latin America, whereemployee numbers rose by about 5.3%, was the region with the largest increase in comparison with 2007.

Atento, employing over 132,000 people, was the company that made the largestcontribution to the Group in terms ofemployee numbers.

Headcount trend

The most important factors affecting the size of Telefónica’s workforce were the following:

• The creation of new jobs at Atento (+7%) and tgestiona (+16%) accounted for the increase in the total number of employees at the Company

• During 2008, Telefónica took over theBrazilian companies Telemig (1,280) andTVA (253) in Latin America and AtentoCzech Republic (456) in Europe.

• In Spain, the workforce fell by 1.4% as partof the ongoing redundancy programmeinitiated by Telefónica Móviles España,Telefónica Soluciones and TID.

• In Europe, employee numbers rose by 0.1%.

Professional profiles

Excluding Atento, 41% of our workforce isemployed in sales, 46% in service provisionand 13% in support services.

On average, employees of the TelefónicaGroup have been with the Company for 6.1 years and the average age is 35.6 years1.At Atento, where these figures are lowerdue to natural turnover, employees havebeen with the company for an average

of 1.8 years and the average age is 28. 49% of the Company’s employees arewomen and this figure rises to 61% in the case of Atento.

Within the Telefónica Group, 97% of the workforce either has a permanent or indefinite employmentcontract (84% in the case of Atento). The proportion holding management or executive posts in the Group is 7.1%2 (4.1% in the case of Atento).

Employees


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1 This figure does not include Atento.2 This refers to the proportion in percentage terms of managers and middle management staff compared to the total

workforce. The 2008 figure does not include Telefónica Europe.

Workforce per region

2008 2007 2006 Change 08/07

Spain 52,576 53,300 57,058 -1.4

Latin America 173,014 164,231 142,983 5.3

Europe 29,349 29,310 33,818 0.1

Rest of the world 2,096 1,646 1,041 27.3

Total Group 257,035 248,487 234,900 3.4

Employee indicators 2008

Excluding Atento Including Atento

Total number of employees 125,022 257,035

Spain 40,201 52,576

Latin America 55,928 173,014

Europe 28,893 29,349

Rest of the world - 2,096

Employment evolution

Number of new hires 14,477 148,519

Voluntary redundancies 6,696 93,508

Mandatory redundancies and severances 9,297 48,579

Incorporations following acquisition of companies 1,643 2,099

External rotation 12.8% 55.3%


Last year, this indicator stood at 66%1

The Index of Employee Satisfaction andCommitment was 69%, 3 percentage pointshigher than 2007The greatest degree of satisfaction in the Employee Satisfaction Survey last year wasregistered by employees in Latin America and Europe, where it exceeded 75%. In Spain, this perception improved by five percentage points.

In order to continue improving its performance, the Company will deploy a tool in 2009designed to manage the degree of commitment of its employees: detailed measurementswill be taken that will then be used to monitor improvement plans.

...Index of Employee Satisfaction and Commitment

Goal: the best place to work

In 2008, after examiningworkplace ambience and the management methodsapplied to people, Telefónica Móviles Ecuadorand Telefónica Móviles Uruguay weresingled out as the best places to work in their respective countries. Likewise, the companies in Colombia, Chile,Argentina, Peru and Mexico stood out in the ‘Great Place to Work®’ (GPTW)ranking. In 2009, Telefónica O2 Germanyhad already secured the third place in the GPTW ranking.

Elsewhere, Telefónica was designated oneof the TOP employers to work for in Spainaccording to the internationalorganisation CRF.

Telefónica Ecuador. GPTW presentation.

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• Operating as an international company thatunderstands and manages diversity throughpolicies and processes that promote internalmovement and exchange of experiencesworldwide. With this in mind, a new modelfor managing international job rotation waslaunched in 2008 with the aim of reachingover 300 people in the programmes, anincrease of 67.5% compared to 2007. Inaddition, maximum advantage was taken ofUniversitas Telefónica, the Company’scorporate university, which received studentsfrom all regions.

• Sharing talent, by placing the best people inthe best jobs, and establishing a stream oftalent throughout the organisation. This wasachieved in 2008 through the implantation ofa new leadership model, based on globalgrowth; exchange of knowledge wasencouraged through the collaborative tools e-kiss, which recorded 250,000 documentdownloads and ‘Commercial Wings’ (CW),centred on sales and marketing experiencesand used by 5,400 people.

Evolution of employeesatisfaction

The initiatives that were put into place resulted inan improvement in the Employee Satisfaction andCommitment Index in 2008, which reached 69%,three percentage points higher than in 2007 andwith a participation rate in the survey of 70.4%.

The main improvement was registered by the relationship with colleagues; here, thesatisfaction index was 68.9%, 4.8 percentagepoints higher than in 2007. In general, theaspects that were most appreciated were theCompany’s image, the pride of belonging to theCompany and the leadership qualities ofimmediate superiors.

In spite of the progress registered in career development (+3.7 points), the Company nevertheless still sees room for improvement in this area.

A further step in monitoringemployee commitment

The challenge for the coming years is that of progressing from simply measuringemployee satisfaction ratings towards the goalof comprehensively managing their degree ofcommitment. With this aim in mind, in 2008, 14 Telefónica companies implemented the toolMeasurecom, which incorporates all thoseaspects concerned with employee commitment(measurement, communication of results,recording and monitoring action plans).

This system, based on a successful experience atTelefónica Europe, will increase response levelsat all stages of the cycle and will facilitate theparticipation of the whole organisation in theprocess of transformation and improvement.

Telefónica’s vision of its employees consists of ‘encouraging their professional growth,development and well being; fostering theirtalent; recognising diversity, initiative andinnovation and remunerating them in a way that is both fair and transparent’.

Strategy

In order to achieve this goal and become thebest place to work, in 2007 the Companylaunched the ‘Employee Promise’ initiativebased on four cornerstones:

• Improving employee satisfaction byproviding employees with the best possibleworkplace. Progress towards this goal wasachieved by realising the promises made toemployees at the Group’s various operators.Just one example of the success obtainedwith this initiative is Telefónica O2Germany, recognised as a ‘Great Place ToWork®’ in 2009, which drew up a series ofpromises on subjects such as remote work,time optimisation and reconciling familylife with work based on the opinions of itsemployees.

Other global activities were aimed atoptimising the relationship betweenemployees and managers and using 360ºfeedback as a tool for managment andjunior managment levels aimed toimprove team confidence.

• Constructing a high-commitment culture,by highlighting individual commitmentand recognising the best contributions to innovation and efficiency. This pillar wasdeveloped through online traininginitiatives and which idea programmesencourage and reward the contribution of employees.

1 The figures correspond to the new Satisfaction and Commitment model. The results for 2007 have been adjusted to reflect the changewith respect to 2008. The ICC Index records the average number of favourable replies (‘I agree’ and ‘I completely agree’) to the 33questions contained in the annual survey of Employee Satisfaction and Commitment in which all Telefónica employees participate.

In 2008, a total of more than 30,000suppliers were awarded business

Telefónica awarded over 25,926 million eurosworth of contracts, consolidating electronicsourcing with its suppliersThe ten most important suppliers in terms of contract amount awarded were the following: Nokia, Sony Ericsson, Nokia Siemens, Huawei, Samsung, Apple, Alcatel Lucent, Motorola and LG.

In 2008, electronic sourcing accounted for over 18.000 million euros of which 3,750 million euros were placed by electronic auction.

Telefónica’s procurement model

Telefónica employs a global procurementmodel that, in turn, takes into account theparticular features of the markets where it operates. This model, developed over the last eleven years, has continued toincorporate important innovations. It isbased on the principles of transparency;competitiveness and equality ofopportunities; objectivity and unanimitywhen awarding contracts; aimed at internal and external customers andmeeting commitments on both sides with the suppliers.

In 2008 the Company intensified the use of electronic commerce whennegotiating with suppliers, the applicationof the principles of Social Responsibility in the purchase and supply chain and collaboration with partner firms:Telecom Italia and China Unicom.

Last year was also characterised by anincrease in purchases in new Asiaticmarkets, thus stimulating competition and giving new suppliers from emergingmarkets the chance to participate. Inparticular, the negotiations between Asiatic suppliers/manufacturers reachedover 4.8 million euros.

Product lines

Telefónica divides its purchases into six Product Lines: Network Infrastructures (which represents 16% of the Company's total purchase volume), Services and Works (31%), Market Products (includingcustomer devices, in particular mobilehandsets, representing the 33%), IT Systems (10%), Publicity and Marketing (8%) and Contents (2%).

Electronic commerce

Telefónica has for many years now beenengaged in a profound transformation of the Purchase function through the use of a single electronic commerce platform forall the operations it performs involving itssuppliers within the purchase and supplychain: invitation to tender, acceptance andnegotiation of offers, contract, order,delivery note, receipt and invoicing.

In 2008, the Company continued topromote the use of electronic sourcing in order to benefit from the advantages this affords both for the supplier and forTelefónica. Sourcing spurs competition,provides suppliers with transparency and equal opportunities and leads to increased operating efficiency and savings in administrative costs. Electronicsourcing exceeded 18 billion euros (34,410transactions) from which 3,750 millioneuros were realised using the electronicauction method (6,002 in total).

This sourcing model is employed inpractically all the countries where Telefónica operates. Last year, it wasimplemented in Germany, Ecuador, theUnited States, the United Kingdom andUruguay. These countries joined thosewhich already used the system: Spain,Argentina, Brazil, Chile, Colombia, ElSalvador, Guatemala, Mexico, Nicaragua,Panama, Peru, Czech Republic andVenezuela. In 2009, there are plans to implement it in Ireland and Morocco.

Telefónica is also promoting the use ofelectronic methods when completing orderformalities with suppliers (award of tenderletters, contracts and orders) given theconsiderable advantages of completing allpurchase and supply operations - including

Suppliers


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24,179

2006

25,242

2007

25,926

2008

Purchase volumeMillions of euros

12,469

2006

16,519

2007

18,152

2008

E-source managedManaged via auctions

1,3672,563

3,750

Evolution of electronicsourcingMillions of euros

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invoicing - via electronic means. It allows alloperations to be linked in a sequence and interms of data: contracts, orders, deliveries,receipt of goods and invoices, emphasisingthe integrity of these operations.

E-commerce operations totalled 7,406million euros in 2008 and these operationsincluded award of tender letters, electronicorders and contracts. Likewise, in 2008, theimplementation of electronic invoicingcontinued and this method was also usedfor suppliers within the Telefónica Group(18,000 invoices were completed in Spain).

Telefónica has a Supplier Portal on its webpage (http://www.telefonica.com/suppliers)which is used by suppliers when registeringas suppliers of Telefónica. This page can also be used by those wishing to obtaindetails on topics of particular interest such as the products and services acquired by Telefónica, the countries where it operates and further informationregarding its Procurement Model andCorporate Responsibility.

The number of active suppliers usingTelefónica's e-commerce platform hassurpassed 18,000 -an increase of over 12% when compared with the previous year- and the platform is already used in 18 countries in Europe and Latin America (as mentioned previously).

Telefónica ‘ComprasElectrónicas’

2008 saw the consolidation of the activities of Telefónica Compras Electrónicas(TCE), a company created by Telefónica at the end of 2007 in order to provide e-commerce services to Telefónicacompanies via a single, universal platform.TCE continued to implement new functionsthroughout the Purchase and Supply chain and made progress in adjusting the system's performance and availabilityand in improving the service provided tousers. All of this helped to improve usersatisfaction - purchasers and suppliers alike - and led to an increase in the numberof electronic operations carried out.

On average, the platform's availability rating exceeded 99.5% for all modules in2008 and it responded to 18,066 servicerequests (including incidents, consultationsand user requests). The average supporttime was gradually reduced during 2008and stood at less than one day in December.

Other external Telefónica customers(purchasers) also began to be incorporated onto the platform in 2008.

Telefónica also forms part of Adquira'sElectronic Market (e-Marketplace) in whichother large companies such as Repsol, Iberiaand BBVA also participate as well as manysmaller firms. Both purchasing companiesand suppliers derive numerous benefitsfrom this marketplace - the former throughsharing infrastructures while the latter gainaccess to a broad market of purchasers.

Collaboration with partners

In 2008, Telefónica intensified its collaborationwith Telecom Italia and China Unicom(formerly known as China Netcom) andadopted a two-pronged approach in doing so:through exchanging information on applyingbetter practices in procurement processes andsystems and by carrying out joint purchaseswith relevant suppliers, something which is advantageous both for the companiesinvolved and for their suppliers.

Implementing CorporateSocial Responsibility

In 2008, the Telefónica Group achievedprogress in the implementation of its policy of Corporate Social Responsibility throughoutthe Purchase and Supply Chain. The mostsignificant projects concerned the riskassociated with suppliers in terms of CorporateSocial Responsibility and the actions to betaken in response, encouraging responsiblepurchases from socially responsible suppliersand collaboration in the projects that havebeen launched globally by Telefónica dealingwith energy efficiency. These initiatives will bedescribed in detail in the chapter BusinessPrinciples contained in this report.


• Notification in all cases of results tothose not awarded a tender. This wasachieved internally by intensifyingmonitoring of Purchase Areas with the aim of ensuring fulfilment of this commitment.

• More attention paid by Telefónica to aspects related to the degree of compliance by suppliers withenvironmental standards. With this inmind, in 2008 the Company evaluatedthose suppliers which were most at riskof failing to comply with environmentalstandards (as well as other aspects of Corporate Social Responsibility).

Suppliers satisfaction

Every two years, Telefónica carries out a survey of its main suppliers in order to determine their degree of satisfaction and identify which aspects have beenpositively valued and where there is roomfor improvement. This survey was compiledat the end of 2007 and in 2008 variousinitiatives were put into place based on the three aspects that were found that could be improved:

• Reduction in the time required to managepurchase processes, which was optimisedin 2008 by reducing the average timerequired to manage purchases to 14 days(as opposed to 15.5 days in 2007) and inaddition, more intensive use of electronicmeans when formalising orders with theaim of notifying suppliers about orderconfirmations in a more efficient andflexible manner.

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More than 60 initiatives in Spain, Europe and Latin America

Telefónica invested more than 370 million euros1 aspart of its commitment to bridge the digital divide

Digital inclusion


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Part of the strategy of Corporate Responsibility 2.0 defined by the Company in 2008 concernsthe contribution that can be made in creating an inclusive society through the use of ICT.

The Group allocated 275 million to the Universal Service Funds; close to 15 million, to ICT training activities; and more than 80 million in projects to reduce the economic and geographic divide.

Universal Service

The Company regards the obligation toprovide a Universal Service as synonymouswith equality, solidarity and social cohesion.

• In Spain, Telefónica Spain's obligation toprovide a Universal Service was reneweduntil 2010 for connection services to thepublic telephony network from a fixedlocation and access to the telephoneservice, public telephone kiosks,directories ('white pages') and specialservices for specific user groups (peoplewith disabilities, pensioners...). During2007, the net cost for the Company ofproviding the Universal Service was 104 million euros.

• In Latin America, Telefónica companiescollaborate with various public initiativesaimed at extending service provision to all parts of the population. In 2008,Telefónica made a net contribution of 162 million euros to the UniversalisationFunds set up in Argentina, Brazil,Colombia, Peru and Venezuela.

• In the Czech Republic, Telefónica O2offered the following services derivedfrom the Universal Service: telephonedirectories, directory enquiry services,public phone boxes and special offers for disadvantaged groups. During 2007,the net cost for these services was morethan 8 million euros.

Geographic divide

The geographical divide is the barrier thatprevents telephony services from beingestablished in rural areas due to the extracosts associated with doing so. In 2008,Telefónica worked to extend telephony torural areas through the following projects:

• 'Cobertura 2008' (Coverage 2008)(Ecuador): initiative aimed at improvingmobile coverage in suburban and ruralareas and main roads. During 2008, 87.2% of the population receivedcoverage.

• 'Intégrame' (Integrate Me) (Peru): a public-private alliance for developingtelecommunication services in rural areaswith high rates of poverty. The use ofwireless technology enables mobile andfixed services to be provided as well asaccess to Internet and television. Around20,000 people benefited from theprogramme 'Intégrame' in 2008 distributedin 61 different population centres.

• 'Second Biannual Plan to extend andreplace social telecommunicationnetworks with wireless solutions'(Colombia): replacement and extension of telecommunication networks in 1,400localities located in 330 municipalitiesusing funds provided by theCommunications Fund. 25,000 familieswill benefit from this project, which willcreate over 200 call centres in 2009.

• 'Plan to Extend Rural Broadband' (Spain): a programmed sponsored by the Ministryfor Industry, Tourism and Commerce and supported by the autonomouscommunities and Telefónica España. In October 2008, the number ofcustomers amounted to 110,470.

Economic divide

Revenue inequality is a barrier for access to ICT solutions. For this reason, Telefónicaoffers fixed and mobile telephony services toeverybody, including those who are less well off or those who have problemspaying their bills.

At the end of 2008, over 82% of Telefónica's123 million mobile customers in LatinAmerica used prepay products that allowconsumers to control their expenditureeffectively. In addition, the deployment of GSM networks contributed to drivingdown the cost of handsets.

At the end of the year, the number of prepayfixed lines with controlled usage amountedto over 6 million in Spain and Latin America.This programme is based on prepay fixedlines that help customers on low incomeswho would otherwise have difficulties inmeeting the costs of installing a telephone intheir homes. This is the case in Chile where14,000 customers have access to Broadbandthanks to the prepay Broadband plan.

Similarly, Telefónica continued to innovate in the creation of products and services that are accessible for less privilegedmembers of society:

• 'Fonoya' (Peru): a service that offers thepossibility of obtaining access to the fixedtelephony network by acquiring a handsetthat only has to be connected to the mainselectricity supply and paying a sum equal to one sol per day (0.30 dollars).

• 'Microrecargas' (Microtop-up) (LatinAmerica): a service that offers prepaycustomers the possibility of topping uptheir account balances with amountsranging from 0.5 to 5 dollars.

1 104 million euros correspond to the net cost for 2007 forTelefónica España's provision of the Universal Service.

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Training divide

Even where Information andCommunication Technologies are available,some people are incapable of using them,due to a lack of training. According to theCentre for Sociological Research (CIS)1, 91.9%of people over the age of 65 do not use theInternet, and of these, 58.1% admit that theydon't use it because they don't know how to.

Telefónica is carrying out a number ofinitiatives aimed at teaching people how to use and derive benefits from newtechnologies. During 2008, over 230,000people took advantage of these educationalprogrammes. Similarly, the Companypossesses information centres in Latin America that offer low-cost Internetaccess financed by subsidies provided byvarious education ministries to communityareas or districts with the aim of supportingeducation, employability and theentrepreneurial spirit of citizens.

Telefónica also invests in programmesaimed at improving the technological skillsof the youngest people, together with theirparents and teachers. For example, last year in Spain and Latin America, on-siteeducational activities, both online andmixed, were developed as part of theEducaRed programme, amounting to606,787 hours for teachers, pupils, parentsand other people from eight that is 53%more than in 2007.

Health and disability divide

During 2008, Telefónica continued working inthe areas of health and disability:

• The Company developed a tele-assistanceplatform which allows remote care ofdependent people and that, in the future,will be able to incorporate numerousservices, like rehabilitation, monitoring,leisure, company, etc. The platformstarted working last year, as a pilot.

• In 2008, Telefónica signed an agreementwith the State’s Confederation of Deafpeople (Confederacion Estatal de PersonasSordas, CNSE), to collaborate in the start upof a sign language tele-interpreting service,at a national level. The collaboration startedby checking the technical feasibility of theplatform developed by the R+D centre inGranada, and hopes to have the servicetake shape in 2009.

• In Spain, the Company launched a voiceSMS service (converts the text of an SMSto voice); and 6 new models of adaptedlandline telephones.

• In the rest of Europe, it is worthmentioning that Telefónica O2 Germany,successfully marketed Motorola’s ‘easyand practical’ Einfach-Handy W220. In theCzech Republic and Ireland, we offeredthe Emporia Life, specially designed forolder people or people with disabilities,

and in the Czech Republic we alsopromoted discounts and special offerstariffs for older people or vulnerablepeople. In the United Kingdom, there is a special text-relay service and welaunched a special website withrecommendation for choosing a mobile phone.

• In Latin America it is worth mentioning,the mediation centres for the deaf inArgentina, Brazil and Colombia, with360,000, 45,000 and 15,000 callsanswered, respectively, in 2008.

In 2009, the Company will initiate astrategic project on e-health (health andwell being), aimed at designing an offer ofservices related to health and well being,which will include specific proposals forpeople with disabilities.

Social awarenessIn 2008, the Company decided to launch the ‘Ability Awards’ prizes in Spain, alreadyput in place by Telefónica O2 Ireland in order to recognise companies or institutionswith sustainable business models that areaimed at people with disabilities.

For this reason, Telefónica will create aboard on which the business associationsand most important disability organisationsin Spain will be included.

Anti credit crisis plan forSME's and those out of work

In March 2009 the Company initiated ananti credit crisis plan for SME's and thoseout of work, measures including discountsof up to 50% on invoices for customers whoare unemployed, with a limit of 20 euros per invoice. Up to half a million invoicescould benefit from this help, this year.

The Telefónica announcement initiated arapid response to the customer serviceslines (1004, SME's, Internet) registeringaround 10,000 calls over the previous days from clients interested in the plan

requesting a cost-control assessment of their telecommunication needs.

Due to this commercial success, a newoffice of Commercial Assessors was set-up,the objective being that each customer of the Company should get the best offersas well as products that are best adaptedto their needs. This office is open 24 hoursa day, from Monday to Sunday, on thefreephone number 900 380 390. Up to the publication date of this Report, this service had registered more than 4,500 calls and more than 100,000unemployed customers had completedapplications to receive discounts on their bills.

On this basis the websitewww.telefonica.es/teayudamos was set up to process customer requests. There have been more than 200,000downloads of the subscription forms.Additionally some 3,000 new businesseshave also shown an interest in help and discounts tailored for them.

1 Source: Barometer Survey CIS No. 2754. Data from February 2008.

´Fonoya´ project, Peru.

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In 2008, the Company created wealthvalued at 69,459 million euros

Telefónica is a driving force for economic,technological and social development in the countries where it operates1

In 2008, the Company earned more than 69,000 million euros in revenues. These revenuesallowed it to pay out 6,767 million euros to its employees (5% more than in 2007); 10,336million euros to Public Administrations (4% more than in 2007); 32,832 million euros toits suppliers (2% more than in 2007); and about 6,700 million euros to its shareholders

(22% more than in 2007).

In 2008, Telefónica set aside over 4,600 million euros for technological innovation, whichrepresents an increase of 6% with respect to 2007. 668 million euros of this amount wasinvested in Research and Development (R+D), making Telefónica the sixth largest companyworldwide in this category and the first amongst Spanish companies, with an amountdedicated to investment that is 4 times that of the runner-up in this ranking2.



69,459

revenue

payments

Shareholders6,682

Customers69,070

Disinvestments276Other income

113

Suppliers32,832

Employees6,767

Publicadministrations10,336

CapEx7,889

FinancialBodies (net)4,953

1 Data in millions of euros.2 Source: ‘The 2008 EU Industrial R+D Investment Scoreboard’.

Note: This information has been calculated on a payments basis, whereas the information on the following page has been calculated on an accruals basis. The information published on this page has been obtained from internal cash flow evolution sources of the Telefónica Group and verified by the auditor of the CR report. The data that has been recorded could be affected by variations caused by subsequent events and evolutionary effects that might cause changes in its content. For a detailed analysis of the consolidated financial statements of Telefónica Group, the audited information is included in the annual accounts report.

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SpainSpain Income 20,943 Employees 52,576


7,963 2,303 2,686 3,005 Total accesses 47,350

Morocco Income 67 Employees 2,096



EuropeGermany Income 3,561 Employees 4,805


1,654 924 47 351 Total accesses 15,542

Ireland Income 929 Employees 1,538


270 82 112 91 Total accesses 1,728

Czech Republic Income 2,556 Employees 9,563

+ Slovakia Payments Suppliers awarded contracts 394 (72.9%)

462 293 482 288 Total accesses 8,609

UK Income 7,207 Employees 13,133


3,243 861 840 628 Total accesses 19,811

Latin AmericaArgentina Income 2,627 Employees 21,550


1,033 379 563 408 Total accesses 20,727

Brazil Income 9,132 Employees 82,288


5,274 1,653 3,657 985 Total accesses 60,739

Chile Income 1,942 Employees 13,712


1,010 452 221 245 Total accesses 10,014

Central America Income 570 Employees 5,778


303 126 90 61 Total accesses 6,158

Colombia Income 1,496 Employees 6,108


858 426 293 137 Total accesses 12,803

Ecuador Income 307 Employees 1,083


188 133 34 26 Total accesses 3,212

US and Puerto Rico Income 103 Employees 810


38 6 2 31 Total accesses n.a.

Mexico Income 1,776 Employees 17,768


929 354 37 180 Total accesses 15,464

Peru Income 1,615 Employees 15,213


1,072 293 375 215 Total accesses 14,983

Uruguay Income 161 Employees 615



Venezuela Income 2,819 Employees 8,089


1,239 310 718 166 Total accesses 11,905

1.8%

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0.1%

0.5%

1.7%

0.4%

1.1%

0.8%

1.6%

1.0%

0.9%

0.8%

0.0%

0.2%

1.8%

0.8%

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Telefónica revenue Purchase volume awarded Investments (CapEx) Tax contributions Salaries

Contribution to progressEconomic impact Revenue/GDP Key Figures

• Economic data expressed per million euros (revenue, personnel expenses, payment of taxes, purchases and investments (Capex))• Revenue, consolidated revenue corresponding to all of Telefónica's business units in the country.• Revenue TEF/GDP: ratio between Telefónica revenue (contribution made by country to consolidated revenue of the Telefónica Group) and the country's estimated GDP (Source IMF).• Capex figures are in euros.• Employees: directly employed by the Telefónica Group in the country (total number employed on 31 December 2008).• Suppliers: number of suppliers awarded contracts in the country in 2008. The % in brackets refers to the % awarded to local suppliers (proportion of contracts awarded to suppliers based

in the country with respect to total volume of contracts awarded, expressed as a percentage).• Accesses: represents the number of fixed line accesses + mobile + Broadband + pay TV (expressed per thousand).

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The goal is to provide training to 100% of employees by 2011

Telefónica approved the new rules that will be usedto implement its Business Principles, and trainingin these was provided for 60,219 employees1

During the year, the Business Principles Office approved two policies on Data Protection and Risk Management; and agreed on basic measures for the development of regulations aimedat encouraging the workplace integration of people with disabilities.

In 2008, Business Principles channels received 169 notifications from employees. Additionallyas a consequence of the investigations carried out for possible breaches of the Principles, 358 disciplinary actions were carried out.

Culture and management

Telefónica is seeking to consolidate a new internal corporate culture based on making maximum use of its Business Principles.

The Business Principles are the code of ethics that lay down the guidelinesgoverning the relation between its various interest groups (employees, clients, suppliers, shareholders, publicadministrations and society as a whole).

In order to put its Principles into practice on a daily basis, the Company is developinginternal regulations aimed at:

• Defining the general day-to-dayguidelines and criteria to be activated.

• Providing support to those areas directly involved in the fulfilment of the commitments entered into with its interest groups;

• Manage reputation risk by identifying areas where action should be concentrated.

In seeking to integrate managementmodels, the Company is seeking to ensure the coherence of all of its actions,both its more visible initiatives - social and cultural activities, or products andservices with considerable social impactamongst others - such as those concernedwith aspects of internal management -including the task of apprising employeesof its Business Principles and developing the policies and regulations required toimplement these principles - all with thegoal of establishing a clear link between the Company's public and social aspectsand its business results.

Business Principles Office

Telefónica relies on its Business PrinciplesOffice when it comes to: supervisingimplementation and compliance with itscode of ethics throughout the organisation;identifying and developing regulatorypolicies and providing support both toemployees and to suppliers in mattersrelating to queries, complaints and claims as to the Business Principles.

The Office, which reports directly to theBoard of Directors via the HR, Corporate

Responsibility and Reputation Committee, is made up of the following departments:Human Resources, Internal Audit, theGeneral and Legal Counsel and the GeneralTechnical Secretariat attached to the Chairman's office. It also contains a representative from each of the regionswhere the Company is present: Spain, Latin America and Europe.

The web page dedicated to the BusinessPrinciples was also used as a tool fordisseminating the principles within thecompany; it received 1,430 visits in 2008 and the information brochure wasdownloaded 16,500 times.

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1 Extension of the Supply ChainPrinciples - Contracting of SocialSuppliers

2 Work Integration of Disable people*3 Minimum Environmental

Requirements**4 Risk Management5 Personal Data Protection6 Provision of Adult Content

* In development** Integrated in the new Environment

Management System

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22,142

25,169

12,908

Telefónica España2

Telefónica LatinoaméricaTelefónica Europa

Employees trained in the Business Principles

Drawing up regulations

Last year, the Office identified new areas that were in need of a regulatory base and together with the different areas in the Company, it pushed ahead with thedevelopment of policies designed to ensurethe proper application of and compliance withthe code of ethics. In drawing up these rules,Telefónica is laying down standards that insome cases go further than existing legislation

In particular, in 2008, regulations wereapproved dealing with Risk Managementand Data Protection and the basis was laid for the development of a regulatoryframework governing the workplaceintegration of disabled people.

Risk managementThis policy contemplates a new riskmanagement model in line with the bestpractices contained in Internal Control(Report COSO II and Draft BS3 311002 Code ofPractice for Risk Management). This modelinvolves adapting the Company's existingmodel, in place since 2000, and will establish a common approach foridentifying, evaluating, managing andreporting risks in a consistent and effectivemanner within the Group. This will includea classification of the risks, which, in addition

to the usual financial, credit or operating risks, will include reputational risk.

Data protectionCorporate Policy on Personal DataProtection allows the Company to establishthe basics to guarantee an adequate level of protection of personal data in all of itscompanies, in whichever country they areoperating and independent of the locallegislation on this subject matter.

Future PoliciesTelefónica has scheduled to fully deploy tenpolicies over the next three years: Protectionof Children and Teenagers and ResponsibleUse of ICT; Data Protection Policy;Environmental Management System;Climate Change and Energy Efficiency;Digital Inclusion of Disadvantaged Groups(older people and disabled people); Diversity;Chain of Supply Responsibility; HumanRights; Dialogue with Interest Groups andInternational Social Dialogue; Social andEnvironmental Reporting.

Training

In 2008, the Company continued to makeuse of the on line course launched in 2007 in order to transmit its Business Principles to

its employees. The cooperation offered bythe regional and local Business Principlesoffices in Europe and Latin America proved crucial in carrying out this task.Approximately 50% of employees hadreceived training on 1 March 2009.

Confidential mailbox

The Business Principles mailbox received a total of 169 communicationsduring 2008, either anonymously or by named individuals. Most of the queries were related on how to interpretthe Principles. As a result of theinvestigations carried out for possiblebreaches, 358 interventions were carriedout in order to ensure compliance.


New communicationinitiatives for 2009

In March 2009, together with the internalmagazine 'SOMOS', Telefónica distributedcopies of its Code of Ethics. This edition alsoincludes a report on the Business PrinciplesOffice aimed at reminding employees whatits tasks are. The magazine was dispatchedto 45,000 employees and an on line versionof the magazine was also made available to all those interested.

'Every small decision we make can affect all of us'. This was the message selected byTelefónica Latinoamérica at the beginningof the year in order to heighten theawareness among its management team of the importance of disseminating theBusiness Principles through training.

1 All figures referring to employees who have received training are dated 1 march 2009. Telemarketing personnel have been excluded.2 Includes Contents business, tgestiona and others.3 BS: British Standards. Draft of the document ‘Code of practice for Risk Management’ issued by the British Standards Institution.

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The Company's strategy was founded on Information and

Communication Technologies

Telefónica devoted 115 million euros to social and cultural projects during 2008

Fundación Telefónica continues to be the driving force behind these initiatives: it invested 70 million euros in 3,565 projects from which 40 million people benefited.

Proniño provided schooling for 107,602 children, 103% more than the previous year, freeing them from the risk of being recruited as child labour in Latin America.

Telefónica is convinced of the role that can be played by Information andCommunication Technologies in improvingthe standard of education and promotingequality of opportunities. These areprecisely the aims of its social and culturalinitiatives, for which it set aside 115 millioneuros in 2008, 23% more than the previousyear according to the internationalmethodology LBG, which was adopted by the Company in 2007 to measure andevaluate its contribution to the community.

The projects are implemented as follows:

• Fundación Telefónica, the cornerstone of the Company's social and culturalactivities. Created in 1998, it is present ineight countries: Argentina, Brazil, Chile,Colombia, Spain, Mexico, Peru andVenezuela although some programmesare developed in as many as 14 countriesincluding Ecuador, El Salvador, Guatemala,Nicaragua, Panama and Uruguay.

• Social and cultural sponsorships thathave a positive influence on society, thearts and culture. In 2008, the Companyspent 32 million euros on a total of 170 initiatives.

• ATAM, the Telefónica association aimed at improving the quality of life ofdisabled people. Its integrated care modelincludes advisory services, direct financialaid and services designed to promote theworkplace integration of its members,totalling 58,226 employees.

• Telefónica Europe carries out socialactivities that are mainly centred onyoung people and education. Every year, it adds other initiatives dealing withhealth/disability and the environment.

Fundación Telefónica*, in support of education

Fundación Telefónica aims to contribute to social well being through qualityeducation. In order to fulfil its goals, itcollaborates with educational, social andcultural bodies, both public and private: last year, it collaborated with nearly 270organisations.

Fundación Telefónica has five large-scale action programmes:

• EducaRed, designed to improve educationstandards through the use of newtechnologies. Its website EducaRed.netincludes tools, content and educationalprogrammes as well as collaborationtools. With 32.3 million visits, it is areference point in the Spanish-speaking

world and is present in Argentina, Brazil, Chile, Colombia, Spain, Mexico and Peru and, since 2008 in Venezuela.The programme also develops on-siteeducational activities, forums anddebates. Last year, it extended its scope byconcluding agreements with internationalorganisations and by collaborating withProniño in the 13 countries where thisprogramme has been implemented.

• Proniño. The goal of this programme is to contribute to the eradication of childlabour through schooling. In 2008, itprovided schooling for 107,602 children,doubling the number of childrenbenefiting from this programme in LatinAmerican for the third year running.During the year, the experience of theEducaRed model was drawn upon toprovide teachers, pupils and families with the technological tools required to

Social and Cultural Action


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107,602 children have receivedschooling and avoidedbeing recruited as childlabour thanks to Proniño

'I received my high school diploma last year; I was one of the first batch ofgraduates who received support from the Proniño programme. (...) I think that the support of my parents, with all itslimitations, was my greatest stimulus sincethere are five brothers in all in our family; I'm the oldest and my youngest sister is onlyeighteen months old...I want a better life forher. I want to fulfil my goal of becoming anindustrial engineer; for the moment, due to my lack of funds, I have begun studyingtechnical engineering and I have applied fora grant in order to stay on at university (...)'.

David Ernesto Carías HernándezDavid Ernesto is 17 and in 2008, he received his general high school diploma at the school Cantón San Lucas,Cuisnahuat, Department of Sonsonete (El Salvador).

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guarantee access to quality learning andeducation. This comprised the installationof 74 ‘Aulas Fundación Telefónica’in Proniño educational centres, fully-equipped and connected; the launchof Canal EducaRed del Educador Proniñoin which 25 learning modules weredeveloped and the implementation of the Consultancy Service on EducationalTechnology, which provides teachers with qualified and personalised support.

For 2009, Proniño has set itself the taskof helping 120,000 children, both boysand girls, and teenagers through itsintegral protection initiative and a further 127,500 new beneficiaries through socio-educational initiatives.

• Telefónica Volunteers: In 2008, 21,807employees participated in the CorporateVolunteer Programme. Once again, mostof the volunteers' time, amounting to341,109 hours in total, was dedicated to Proniño and people at risk of socialexclusion. In 2009, the synergies with Proniño and EducaRed will bestrengthened with projects such asSolidarity Holidays and Friend Schools;the latter is an initiative that will enableschools to share experiences over theInternet. In addition, older formeremployees will join the programme and the Volunteer Programme forTelefónica Europe will be created, in which close to 1,000 volunteeremployees dedicated nearly 6,000 hours of support work in 2008.

• Debate and Awareness, which isdedicated to creating knowledge aboutthe Information Society and studying its social impact. Its studies andinvestigative projects foster a betterunderstanding of important aspects of

ICT today. It also carries out analyses anddebates as well as extensive publicationactivities: during 2008, it published 14new titles as part of the Telefónica/ArielFoundation Collection. During the year, italso improved its website and graduallychanged it into an interactive forum aswell as bolstering the magazine TELOS,with a 22 year history.

• Art and technology: the FundaciónTelefónica promotes culture andcontemporary art, establishing a linkbetween technological innovation and the avant-garde through collections,exhibitions, the VIDA competition andarsVirtual. It also manages Telefónica'sartistic, historical and technologicalheritage. In 2008, it organised 31temporary exhibitions and travellingexhibitions in Spain and Latin America. Intotal, 4.7 million people benefited fromthe Foundation's artistic and technologicalactivities, 125% more than in 2007.


Fundación Telefónica published an annualmemorandum containing a description of itsprogrammes and the most significant advancesduring the year. The electronic version of the Annual Report 2008 can be found on the followingweb page: www.fundacion.telefonica.com

Social and Cultural Action by regionMethodology LBG - data expressed in percentages

SpainLatin AmericaEurope

57%40%

3%

Social and Cultural Action by activityMethodology LBG - data expressed in percentages

Socioeconomic developmentArt and CultureEducation and youthSocial welfareEnvironmentHealth and disabilityOthers

49.1%

1.4%

%)%) 16.5%

16.5%

3.1%

1%

12.4%

People directly benefiting from the Fundación Telefónica

Number of people 2008Área Participants/beneficiaries

EducaRed 32,514,635

Proniño* 127,655

Volunteers 246,273

Forum 766,065

Arts and Technology 4,748,375

Other programmes 1,845,628

Total 40,248,631

* Children benefited adding teachers, educators and social agents trained.

Telefónica's Social and Cultural Action (investment)LBG methodology since 2007 - data expressed per million euros 2008 2007 2006

Fundación Telefónica 69,205 51,054 33,015

Social and cultural sponsorships 32,422 28,988 1,608

ATAM 9,174 9,069 8,911

Social activities Europe 3,898 4,228 2,493

Total 114,700 93,339 46,027

Note: 2007 was the first year of accounting for ATAM amounts according to LBG criteria. For this Telefónica used a conservative criterion, publishing contributions of 4.5 million euros for 2007. However in 2008 the criteria was extended and it has been verified that the amounts published in this table are in agreement with LBG methodology.

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The Company set up an Office to manage the global Climate Change

and Energy Efficiency project

Telefónica has committed itself to reducing electricityconsumption in its networks by 30%1 before 2015

One of the main tasks of the Company's new Office for Climate Change is to promote the development of services designed to improve energy efficiency in other sectors.

In 2008, the Group reduced its CO2 emissions by 5%.

Telefónica publishes a special supplement for 2008 on Environment and Climate Change. The electronic version is at www.telefonica.com/cr08/climatechange

Strategy, management and organisation

From Telefónica's point of view, the battleagainst climate change is not just anotherelement of its environmental policies or ofCorporate Responsibility, it is also a challengethat it intends to meet for economic reasonsand for the sake of efficiency as well as beinga new source of business opportunities thatwill allow it to reinforce its competitiveposition on a global scale.

In this respect, 2008 was a key year forTelefónica: on 26th June, the Company'sChairman, César Alierta, announced thecreation of a Climate Change Office at the Zaragoza International Exhibition and established its goal of reducing the Group's energy consumption.

This office, promoted by the Directorate ofTransformation and the General Secretariat of the Chairman's Office, will be charged withthe task of overseeing the reduction in energyconsumption and in the greenhouse gases(GHG) generated by the Company's activities;to promote the development of services thatenable customers and other sectors to bemore efficient; and placing Information andCommunication Technologies (ICT) at theheart of the solution in the fight againstclimate change.

Given the global and transversal nature ofthe Climate Change project, the Office hasfive lines of action, each led by the head of the corresponding area: Operations,Suppliers, Employees, Customers andSociety. This functional structure meansthat it will be possible to implementprojects more quickly, as well as naturallypooling institutional, operating andbusiness strategies.

Goal: reduction in consumption and emission levels

In 2008, Telefónica committed itself toreducing electricity consumption in itsnetworks by 30%1 before 2015 and by 10%2

in its offices. This will considerably reducethe Company's direct and indirect emissionlevels worldwide. In order to determineemission levels, from 2007 onwards,Telefónica has used an internalmethodology based on the Greenhouse Gas Protocol and ISO 14064 which is applied to the entire Company.

In this way Telefónica knows the GHGemissions that are directly controlled by thecompany, named as Scope 1; also thoseemissions that are due to their activity butare generated by other entities (electricalenergy), denominated Scope 2; and lastly asa new introduction in 2008, they alsomeasure the emissions associated withbusiness trips, called Scope 3.

Last year, Telefónica's electricityconsumption was 4,8283 GWh, beingreduced approximately from 41.73 to 39.13 Kwh/equivalent access4.

At the time this report was published, over 70 initiatives were under way and they will continue to be developed during2009 in the various lines of action.

Line of Action Operations:Green Technology

This line of action is concerned with makingTelefónica a driving force for innovation andin the development of projects aimed at

fostering energy efficiency and reductionsin emissions of greenhouse gases innetworks and systems, as well as promotingthe use of renewable energies throughoutthe Company's operations.

In 2008, a Manual detailing Good Practicesfor Energy Efficiency in networks wascompiled which lists about fifty initiativesthat have been evaluated and tested andare capable of being rapidly implemented.Amongst these the following should be noted: the revision of thresholdtemperature settings on air-conditioningsystems, optimisation of electricity demand and the selection of suitable power settings. Likewise, other activitieshave been included in the developmentplans for the coming years.

In addition, a 'Green IT' working team wasset up charged with the task of reducingenergy consumption levels in Telefónicaworkplaces and in data processing centres(CPDs). This team is working on variousprojects, the most interesting exampleconcerns the replacement of IT equipmentwith more energy efficient models.

Climate Change and Energy


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Renewable EnergiesKwh

Auto-generation on fixed and mobile networks 6,523,362

Purchase of renewable energy 530,839,323

Sale to the electrical market 3,300,000

Number of installations with renewable energies 1,636

Tonnes of CO2 avoided 217,073

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Line of Action Customers:An Efficient Economy

This line of action centres oncommercialising ICT solutions that reducethe greenhouse gas emissions associatedwith Telefónica products and services. Itsdirect link with the Company's businessactivities makes it one of the mostimportant tasks of the Climate ChangeOffice. It suffices to say that the greatestachievement of ICT would be to increaseenergy efficiency in other sectors,something that could result in carbonsavings five times greater than the totalamount of emissions predicted for theentire ICT sector for 20205.

In 2008, Telefónica developed variousinitiatives in order to offer its customersefficient solutions such as Telepresence, theConnected Home, a solution that aims tofacilitate distance working, the BuildingAutomation for Energy Efficiency service and other tools aimed at preventing andmonitoring climate disasters.

At the same time, the Company promotedthe bringing to market of more efficientequipment: it brought out the Nokia 3110Evolve in Spain, the first telephone madefrom recycled materials and with a lowenergy consumption; 17,262 units were soldin five months. It also unveiled the UniversalCharger, which has been acquired by 5,000customers in the United Kingdom andboasts an individual energy saving of

2.8 kWh per year. In 2009, the goal is towiden the offer of such products in order to continue contributing to the battleagainst climate change.

Line of Action Society:Positioning

The main aim of this line of action is toreinforce Telefónica's position and that of the sector as key in the fight againstclimate change. With this mind, during2008, various initiatives were pursued withdifferent associations such as the ITU, GeSI or ETNO. A significant event was thepublication of the report 'Smart 2020:towards an economy with low carbon levelsin the information era' by GeSI and ClimateGroup which highlighted the potentialimportance of the ICT industry in reducinggreenhouse gas emissions.

In 2008, Telefónica also actively participated in the campaign 'Plant for thePlanet' sponsored by the United NationsEnvironment Programme and devoted 1% ofall revenues generated during the musicalcareers of groups that came into being andwere promoted under the Espacio Movistarbrand. Furthermore, at the end of the year, the Company signed a collaborationagreement with WWF aimed at raising the awareness of and providing informationto customers and employees about the importance of saving energy andcombating climate change.


1 Kwh / access equivalent2 Kwh / no. of employees3 Energy data will be specifically audited during 2009.4 Equivalent Access: handset for fixed and wireless access on the basis of their relative energy consumption.5 Climate Group and GESI (2008): 'SMART 2020: towards an economy with low carbon levels in the information age'. 6 This data do not include Atento.

Line of Action Suppliers:Sustainable Purchasing

The aim of this line of action is to implementpolicies and procedures that encourage the Company to take into account energyefficiency and carbon content criteria when acquiring products and services.

With this in mind, in 2008, the energy variablewas implemented on a mandatory basis in purchasing processes, based on thecompilation of energetic information files on some product lines (network equipment, air-conditioning systems, IT products andproducts designed for customers) andthroughout 2009, all Telefónica suppliers willbe required to apply this system. Its attributesinclude average energy consumption levels in stand-by or at maximum power.

Line of Action Employees:Awareness and Commitment

In drawing up this line of action, the Office had two goals in mind, linked to oneanother: reduction of the energy consumedduring the daily activities of Telefónicaemployees and the promotion of a cultureof awareness of climate change and infavour of energy efficiency.

To this end, last year, Telefónica continued to promote new mobile work methods, such as distance working.

In fact, at the end of 2008, 2,8496 employeesused teleworking methods and 5,4206

worked under other mobility schemes. In2009, these contributions will be assessedin terms of CO2 emissions.

Energy and emission of CO2Consumption Tonnes of CO2

Greenhouse gasses Indicator 2007 2008 2007 2008

Scope -1 (Direct Emissions) 244,526 122,631

Buildings and Network Consumption of natural gas (thousands of Nm3)125,936 11,036 47,531 20,225

Diesel consumption generators and air conditioning (m3) 12,016 13,633 32,406 36,766

Car fleets Fleet fuel consumption (m3)268,524 28,637 164,589 65,641

Scope -2 (Indirect Emissions) 1,428,381 1,668,269

Office Buildings Electrical consumption in office buildings (MWh)3998,020 754,621 346,438 288,822

Network Electrical consumption in fixed networks (MWh) 3,375,908 4,074,166 1,081,944 1,379,446

Scope -3 (Other Indirect Emissions) - 27,909

Travel Business travel by airplane, train and car (No. of trips) - 131,558 - 27,909

Total tonnes CO2 1,672,907 1,818,809

1 This variation is due to operations by Telefónica O2 United Kingdom.2 The reduction in consumption could be due to the externalisation of services or because of a lack of availability of information in some countries.3 Electrical consumption in offices and networks shows significant variations due to the fact that there exists shared energy accounting in buildings combining fixed operations. Most of the

data reported by the countries for this consumption is made on the basis of estimations that are due to be further defined in 2009.Note: The energy data will be audited specifically during 2009.

For i

ts e

nviro

nmen

tal i

mpa

ct

Strategy

Its new strategy establishes the keys to combine growth and cash

flow generation with improved customer and employee satisfaction

Telefónica's objective is to be the sector leader in the new digital environment

For the Group, leadership means they must be the company that grows the most; a reference point in operative excellence; a multinational that offers the shareholdercompetitive remuneration; the Company that offers greatest customer satisfaction in all markets; the best place to work and a company that contributes to sustainability and development in countries in which it is present.

Communications have become an essentialelement in peoples' lives and demandcontinues to grow. It is estimated that datatraffic flow will increase exponentially,which implies important opportunities toincrease revenue by making the most of thestrengths and capacities of the Company.

Strengths and competitive advantages

Capacity for solid growth in a difficult environmentIn the 2008 financial year, Telefónica revenue was 57.946 million euros, which in organic terms minus equity marketcapital1 amounts to an increase of 6.9%. This growth also included a one pointefficiency improvement.

Commitment fulfilmentThe Company once again fulfilled itsobjectives for 2008 for the sixth consecutiveyear, increasing OIBDA by 10.6%, reaching22.919 million euros and improving theoperative result by 20.4%, reaching 13.873 million euros2.

Roll out of their commercial offer:

• Increase of access and packages: Telefónicaended 2008 with 259 million customeraccesses, compared to 228 million in 2007.This evolution highlights the growingadoption of packaged service offers.

• Promotion of services (TV and TI):amongst the 2008 milestones in thissphere, the launch in Venezuela of the pay television service Movistar TV digitalshould be noted; the increase, up to 70, of the Cable Mágico (Magical Cable)channels in Peru; and the creation of the Media Networks company offeringservices to wholesale operators ofSatellite TV. As such, Telefónica developeda prototype of an on-demand 3-D videoplatform for Imagenio; it promoted theexpansion of Terra TV and television for the mobile phone; and it continued to gain clients for Pay TV in the Czech Republic.

• Advance in the multinational segment:the Telefónica contract with DeutschePost World Net, which operates under the DHL brand, represents an importantstep forward for the Company in the

multinational business sector and showsthat it has the capacity to offer integratedcommunications for leading companies at a worldwide level. To make the most of this, Telefónica has created an area thatwill be in charge of designing the globalsolution strategy for this segment.

More collaboration with third partiesThe content alliances and agreements withcompanies such as Nokia; with ‘Internetplayers’ (Facebook, Google, YouTube, MSN,etc.); with Microsoft to strengthen theircombined global commercial offer or withHuawei, leading supplier in next generationnetworks, to create a centre of innovation inSpain, are only a few of the collaborationexamples from 2008.

Greater level of integrationIn the past financial period, significantadvances were made in the integration of mobile and fixed businesses, both in theorganizational planning and in the businesssphere, thus making the most of synergies.

Scale and diversityIts presence in 25 countries with 257,000employees of different nationalities andcultures, and the diversified profile of itsbusiness (36% of revenue is obtained inSpain; 38% in Latin America and 25% inEurope) are differential competitiveadvantages for Telefónica.

Strategy


1 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and Telemig in April-December 2007. The consolidation of Airwave in January-March 2007 and Endemol in January-June 2007 are excluded. Included within the revenues, is the impact of T.España due to the new model that is applicable for public telephone services use (-147.4 million euros in 2007). - The impact from the sale of shares is excluded from the OIBDA (Airwave, Endemol and Sogecable) in both periods.

2 The basis of the 2007 figures excludes Airwave and Endemol and includes the consolidation of TVA in October-December 2007. The revenue of T. Spain is set by the new business model for public use telephony services. As a result, the group's earnings are adjusted according to this new model. The 2008 figures include TVA, DeltaX and Telemig (from April 2008). The Telefónica Capex excludes the Real Estate Efficiency Programme. Growth reported for 2008 targets assumes constant exchange rates in 2007. In terms of calculating targets, OIBDA and OI exclude exceptional revenues and expenses not forecast in 2007.

203.2

2006

228.7

2007

258.8

2008

Telefónica access evolutionMillions

Single vision for the whole Group

Over the next few years, Telefónica will continue to make the most of itsstrengths and capacities to reach a visionthat is specifically aimed at customers,employees, the company and shareholders,with the aim of giving adequate responsesto each of these interest groups by meansof the strategy that has been set in place up to 2011.

The pillars of this strategy are innovation, transformation andsustainability. The Business Principles guide Company activities to guarantee an overall management of the process.

Six aims as leaders

The Company has defined six aims, theachievement of which they will work on over the next years in order to be the sectorleader in the new digital environment:

1. Greater customer satisfaction2. Best place to work3. More growth4. Reference point for operative excellence5. Competitive remuneration to the

shareholder6. Contribution to sustainability

To achieve these aims, Telefónica isdeploying its new strategy by means ofregional plans adapted to its particularbusiness features - Spain, Latin America andEurope - and with the focus placed on theseobjectives for 2011:

1. To be leader in customer satisfaction in all countries and regions.

2. Continue to improve employeesatisfaction within the Group

3. More growth.

4. Be a reference point of operativeexcellence.

5. Increase shareholder return by 1 euro (profit per share and cash flow per share)1.

6. Be the number one in the rankings2 as the company with the best reputation in each country.

In the same way in 2009 the Company will focus on achieving its investor promises and will once again have the best results in the sector. Telefónicaforecasts a year-on-year growth ofconsolidated working capital (OIBDA-CaPex)of 8% / 11%; and a year-on-year increase of the OIBDA consolidated from 1% / 3%3.


1 Forecast increase 2006-2010.2 According to RepTrak™, a reputation study based on the methodology developed by the Reputation Institute and the Corporate Reputation Forum.3 The base figures for the 2009 guidance assumes constant exchange rates in 2008 (average for 2008). Due to the guidance calculations, the OIBDA excludes capital gains and capital

losses due to the sale of companies and consolidations.

...employees“Offer our professionalsthe best place to work”. How to make the vision

come alive for our customers

High-speed networks with total mobility+

Innovation in applications and services+

Simpler offers and unified commercial models=

Excellent “Customer Experience”+

Emotional Relations=

Objective: Customers thatare more satisfied

...society“Be a driving force for

technological, economic andsocial development withinthe communities in which

we operate”.

societyi f f

...customers“Enrich our customers

lives through atransparent, intuitive

and varied offer ofservices that will help

them to get connectedand communicate with

each other”.

Whatthe vision

meansfor...

...shareholders“Offer ourshareholders thebest combinationof growth andprofit in thesector”.

The Company vision:

‘We want to improve people's lives, facilitate business development and contribute tothe progress of communities where we operate, offering innovative services, based onInformation and Communication Technologies’.

Equippingof clients ApplicationsBroadband

connectivityAccess and

voice

This will be established between 2009and 2011 with regional plans according

to business characteristics

Telefónica's strategy pillars: innovation,transformation and sustainability

Innovation should allow the Group to offer complete communication, information and entertainment solutions.

Continuous transformation of the business is aimed at increasing efficiency and maximising cash flow.

To increase value over the long-term, as well as maximising results, the Company will be emphasising its sustainable development, also based on employee and customer satisfaction, and its reputation in the countries in which it is present.

Innovation

The Company strategy between 2009 and 2011 includes innovation as a lever toincrease business volumes, in a context inwhich its customers are constantlychanging and increasing theirrequirements.

All technologiesTelefónica reaffirms itself as an operator thatuses all technologies to reach the customerin the best possible way. The aim is to makethe most of new sources of growth, for atotally digital life.

Focus on applicationsThe multinational strategy is contemplatingthe increase of its revenue sources to beable to compete with greater intensity inequipping customers and above all in

applications, making the most of mobilephone capacity as an Internet device, as aproduct which has ears (microphone),mouth (loudspeaker), sight (camera), touch(tactile screen) and intelligence (operativesystems); it is reachable and personal.

To reinforce the offer, the followingpriorities will be centred upon:

1. Simplification of focus, placing anemphasis on services based oncommunities and communicationservices.

2. Create new services based on theconvergence of the three screens(television, PC and mobile).

3. Have a personal user interface to facilitate the management of developments.

4. Open up platforms and place them at thedisposal of other companies, exploitingthe possibilities of joint collaboration tothe maximum.

All this will be based on the network,platforms and information systems.

Innovation in collaborationThe Company will establish newcollaborations with other operators, withother device and Internet companies,especially for innovation. The idea is tocontinue to multiply partners so that theymay develop new applications that could beincorporated into the Telefónica offer.

The customer as a source of inspirationTo steer the innovation correctly, Telefónicawill use a common method, the ‘CustomerExperience’, adapting to the characteristicsof each country, this will allow betterunderstanding of customers, people with lifestyles that are ever more digital,ever-more demanding and with new needs - today's consumers like to always be connected, share information withothers, multitask, be selective... As such it will continue to incorporate theexperiences of users into the developmentphase of services.

All areas can have innovationThe Company will continue to pursueinnovation amongst its professionals by means of different initiatives that allow it to make the most of the experience within the organisation.

Strategy


Scope of innovation

Transformation

In the next few years, Telefónica forecaststhat it will accelerate its process oftransformation to be more efficient inprocesses and activities. For this, thefollowing keys have been identified: speedup the launch of products and services,make the most of the global scale andreduce unnecessary complexity.

Specifically, in 2009, it wishes to improveefficiency, to help achieve the objective of ayear-on-year operative cash flow growth(8% / 11%). The scheduled lines of action toachieve this are as follows:

• Improve efficiency rate: the Company will reduce its Opex (operative expenses)and CapEx (capital expenses) in order toincrease efficiency. As such, its strategy for 2009 is to preserve the high cash flowgeneration in the markets with a morecomplex economic scene, at the sametime capturing growth potential withinexpanding markets. Its commitment forthe financial year is that investmentshould be less than 7,500 million euros(the Consolidated CapEx increased to8,401 million euros in 2008).

• Consolidate integrated multichannelmanagement: to boost thetransformation process, the Company will rely on the Multi-local ManagementModel, which involves the followingorganizational profile:

1. Local operations will work morehomogenously. In reference to customers,they will use the ‘Customer Experience’methodology, adapted to localspecifications. In the business plan, theywill move towards unified channels tomake customers an integrated offer. And,as for production, integration will be total(shared services, co-investment, networksand single systems, etc.)

2. Regional units will reinforce their supportwork and will look for new synergies.

3. In 2008, it moved from being acoordinating Corporate Centre to aCorporate Centre that is more committedto the business units that will developproducts and services, and the objective

is to ensure cost reductions on two fronts: innovation (to contribute to theincrease of revenues) and transformation(to increase efficiency).

• Make the most of scale: Telefónicatogether with its partners China Netcomand Italia Telecom, has more than 600million accesses, which implies apowerful force with which to obtainsynergies. In the next few years they will make the most of this area, in order to achieve savings in purchases,exchange better practices, form allianceswith key ‘players’ and capture more globalcontract opportunities withmultinationals.

• High speed networks: as well assupporting the service provided, anadequate network is perceived as the ideal tool to increase efficiencysignificantly. In this sense, the priority is to use CapEx intelligently in order tobuild, little by little but systematically, a network offering customers thebandwidth they require, dynamicallyadjusted to their needs and qualityexpectations. The idea is that the network should also have total mobility,indoors and outdoors, a large capacity for transport and storage in order tosupport virtualisation and cloudcomputing (technology that allows theprovision of computer services via theinternet).

Company positioning is to increase thenumber of customers connected to amobile network and with access toBroadband and Internet by means of fibre optics. This will permit them to offer users a better quality experience.

• Shared networks and collaborationagreements: network sharing will be used to reduce CapEx, improve costefficiency on the network and improvequality. This line of work will be ever more relevant as the costs incurred as a result of mobile data increase.

• Less is more: the new Telefónica strategyis contemplating the acceleratedsimplification of the product and servicesportfolio with the objective of having a single global offer and to rationalise the mix of channels with an integrationto make more of the on line channel, for example. In the same way, newconverging processes will be carried out to develop products, reducing theTime to Market. Network architecture will also be simplified.

• Cultural transformation: within theorganisation work will be undertaken to promote a culture in which there isefficient management and where thequality and satisfaction of the customerare priorities.


Transformation keys

Improve thecustomer

experience:

To promote growth: ‘quality and value’

Strengthen groupadvantages:

To make the most of size: ‘more muscle’

Value flexibility: To get the organisation to focus on whereto add value: ‘lighter and quicker’

Simplicity toreinvent:

To reduce unnecessarycomplexity: ‘less is more’

To accelerateChanges

Strategy


Sustainability

Telefónica sees in sustainable management,the opportunity to differentiate itself andincrease its long-term value (or value toperpetuity). Therefore, as well as offering its services to the best of its ability, it is also trying to contribute to the progress of countries in which it is present, improveits reputation, increase customer andemployee satisfaction and look after the environment...

Leaders in customer satisfactionTelefónica's objective is to be considered as the company that is best valued by its users by 2011 - in every market in which it is present.

In order to increase customer satisfaction,Telefónica proposes to offer adequate realquality, improve perceived quality andcreate emotional links with customers. Forthis they will use the ‘Customer Experience’methodology that is adapted to thecharacteristics of each country. This meansdefining commitments to customers. Aspecific example is the case in Chile, wherein 2008 they made the following offer totheir fixed telephony customers: ‘If we do not achieve our installation times, we will give you a month for free’.

In recent years the Company has made anotable effort to invest in networks andsystems and has dedicated a considerablevolume of Opex in improving customerservice by means of maintenance processes,commercial awareness... As well ascontinuing along this line they have also initiated actions directed at:

• Identifying the causes of customerdissatisfaction, paying special attentionto those who show their dissatisfactionwith the attention they have receivedfrom the call centre and to be proactive in trying to resolve their complaint assoon as possible, keeping them informedas to the status of their request...

• Simplify relations with customers with clearer invoices; simple services, rapid responses from call centres and courteous and reliable treatment in shops...

• Promote cultural transformation of theorganisation, involving all employees. For this, at different operation centres,rotation programs have been establishedfor all employees between the back andfront office in order to understand at firsthand the needs of the customer.

The best place to work in all regionsThere is a correlation between the successof companies and employee satisfaction. For this, to boost the work environment of its professionals, Telefónica has definedfour priorities for 2011: offer employees an ideal work experience to convert them into ‘ambassadors for the Company’; consolidate a culture of high performance; cultivate pride inbelonging to an international company and share global talent.

In 2008, the Employee Satisfaction Indexreached 69%. Towards 2011, the objective isto increase the index as a ‘builder’ of thefollowing areas: leadership (‘The leaders I work with motivate me’); talent (‘I am in charge of my own development andcareer’); culture (‘I am always thinkingabout my customers’); compensation (‘I receive fair compensation and

recognition’); and commitment to the brandand promise (‘I am proud to be a part ofTelefónica’). The increase of this index willensure that by 2011 Telefónica will be the best place to work in all regions in which it is present by following the ‘Great Place to Work®’ methodology.

The tools that the company established or consolidated in 2008 to contribute to this objective, are the following: the newleadership model, launched recently to givea common vision in Spain, Latin America

Indicators for sustainablemanagement

Telefónica, as well as using traditionaleconomic indicators (revenue per user,business numbers, profits etc.), uses thefollowing parameters to measure andevaluate its performance:

• Customers: the Customer SatisfactionIndex (CSI) shows, on a scale from 0 to 10, the level of user satisfaction with theCompany in general and in relation bothto their expectations as well as theircompany ideal.

• Employees: the Employee SatisfactionIndex (CSI) is the average of favourableresponses (‘agree’ and ‘totally agree’) tothe 33 questions from the annual surveyof employee satisfaction, aimed at all

Telefónica employees to measure their level of emotional and rationalcommitment to the Company. The modelis based on the 5 areas with a majorimpact on employees commitment indifferent organisations according tostudies carried out by the CorporateLeadership Council (CLC): leadership,image/pride, daily work, development and customer.

The ‘Great Place to Work®’ methodologywhich evaluates the quality of the workenvironment according to these points:credibility, respect, correct treatment, pride and comradeship.

• Society: the RepTrak™ Index explainswhat the Company's reputation is,according to 7 areas and 26 attributesconsidered, identifying strengths andweaknesses.

Chile’s teams on ‘Inspira’ workshops. They took place todevelope the customer orientation’s strategy.


and Europe; the Corporate University, which opened its new campus in 2009; and the a+ e-learning platform, renewed in order to facilitate its use and offering1,200 courses to all employees. Added tothese are the new compensation, diversity,succession and international careerinitiatives amongst others.

The most admired telecommunications companyTelefónica is convinced that the perception that society has about the sector and about the Company (publicreputation) impacts business and itsdevelopment. For this reason they haveestablished the following priorities:

• Improve perception of others: Telefónicaoperates in a market that has close to2,440 million people. In order to measureits public perception, they use theRepTrak™ methodology, developed by theReputation Institute and the CorporateReputation Forum1.

This methodology has permitted it toidentify the aspects which most impactupon it - ‘Product Quality’; ‘Citizenship’;

‘Work’ and ‘Integrity’ - and identify all the areas in which its efforts should be concentrated in 2009: the ‘Offer’ (all that concerns products and services and customer satisfaction) and ‘Integrity’(integral and transparent management).

The Company objective is to be perceived as the most admired company in the sectoror the second most admired within all thesocieties in which they are operating in 2011.

• Responsible management: in 2008Telefónica renewed its presence in theDow Jones Sustainability Index with a score of 81.4 (their objective is to be the best in class in 2011 in thetelecommunications sector); in theFTSE4Good and FTSE4GoodIbex; andobtained positive assessments by themain analysts of socially responsibleinvestment (CRI): SAM (DJSI), Eiris(FTSE4Good), VIAGEO, KEPLER, F&CInvestments and Citi Investment Research.

• 5 steps for the management of socialimpact: the Company manages its impact in society by placing emphasis on5 steps:

1. Do its work as a telecommunicationscompany, that is, strive for businessexcellence.

2. Initiatives to ensure full and transparentmanagement, using its BusinessPrinciples or ethics code. By the close of2008, more than 62,000 professionalswere trained in these principles; internalpolicies were launched during the year on the Protection of Data and RiskManagement; and the basic lines for thedevelopment of a Standard to EncourageIntegration for Disabled people in theWorkplace were agreed.

3. Maximise the positive impact oftelecommunications, encouraging digitalinclusion - in 2008, Telefónica carried outmore than 60 projects aimed at reducingdigital divides (geographic, economic andtraining) -, or with solutions to encourageenergy efficiency and care of theenvironment.

4. Maximise social and cultural action. In 2008, Telefónica invested nearly 115million euros in this activity and morethan 100,000 children were educated via the Proniño program.

5. Transparency in communication. In 2008,the Company created groups for dialogueand published 14 reports on CorporateResponsibility in 17 countries.

1 The 'Foro de Reputación Corporativa (fRC)' Corporate Reputation Forum is a meeting point, to analyze and share trends,tools and corporate reputation management models, founded in 2002. Presently, its members are Agbar, BBVA, Repsol YPF,Telefónica, Abertis, Ferrovial, Gas Natural, Iberdrola, Iberia, Renfe y Metro de Madrid.

Offer

Integrity

Lead

ersh

ip

Finances

Innovation

Work

Citizenship

Confidence

Esteem

AdmirationIm

pres

sion

RepTrakTM

Good resultsGenerates profits.Potential for growth.

Satisfactory complaints management.

Response for product/services quality.

Satisfies customer needs.Product and services quality.

Quality/price ratio.Good customer care.

Launch of innovativeproducts/se rvices.

Easily adapts to change.

Innovative company.

Good place to

work.

Cares about employ

eewelf

are.

Has good emplo

yees.

Pays employees fa

irly.

Offersequalopp

ortun

ities.

Ethical behaviour.

Open and transparent.

Responsible use of power.

Supports good social causes.

Well

orga

nised

.

Contributes to society.

Clea

r visi

onof

the f

utur

e.

Protects the environment.

Hasa

stron

gand

respe

cted l

eade

r.

RepTrak™ReputationMethod

Results

• Telefónica ended 2008 with a solid set of results, underpinned by the strongorganic growth reported by thebusinesses and the Company's highexecution skills:

- Total accesses rose 13.2% year-on-yearto around 259 million at the end of2008, driven by the sharp increase inwireless (+16.6%), broadband (+20.9%)and pay TV (+29.7%) accesses.

- In reported terms, revenues rose 2.7%while OIBDA and OI advanced 0.4%and 3.6% respectively.

- In organic terms excluding capitalgains1 growth accelerated fromrevenue to operating income, withrevenues rising by 6.9%, OIBDA by14.7% and OI by 28.7%. Revenuescontinued to grow at a similar samepace as in the first nine months(+7.0%), while OIBDA and OI increasedthe gap in terms of growth rate vs.September by 4.9 percentage pointsand 10.7 percentage points, respectively.

- Net income reached 7,592 million euros in 2008, up 38.0% from 2007 on a like-for-like basis2. Basic earningsper share stood at 1.63 euros in 2008,41.4% higher than in 2007 on a like-for-like basis2.

• The Company's ongoing focus in 2008 on maximising efficiency and cash flowgeneration, in a context of increasingcommercial activity and significantinvestment to expand its networks,resulted in an operating cash flow(OIBDA-CapEx) of 14,519 million euros:

- Operating cash flow grew 20.2% year-on-year in organic1 terms excludingcapital gains, outpacing revenuegrowth by 13.3 percentage points.

- Free cash flow per share reached 1.97 euros in 2008, compared with 1.86 euros a year earlier.

• In 2008 Telefónica devoted 69% of the Free cash flow generated over theyear or 10% of the Company's marketcapitalisation3 to shareholderremuneration.

• Telefónica maintained its financialstrength, with a ratio of net debt +commitments to OIBDA of 2.0x at theend of 2008, at the lower end of thetarget range set by the Company (2-2.5x).

• Once again Telefónica met Groupguidance on all metrics, reflecting thevalue of its highly diversified portfolio of operations. Under the criteria used toestablish its financial targets for 20084,all the metrics across the P&L were at the top end of, or exceeded the rangesannounced to the market:

- Revenue growth stood at 7.3% in a forecast range of 6%-8%;

- OIBDA increased by 10.6% in a forecast range of 7.5%-11%;

- OI advanced 20.4%, topping theannounced range of 13%-19%;

- CapEx totalled 8,544 million euros vs. atarget of around 8,600 million euros.

Financial Highlights


1 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and Telemig in April-December 2007. Excluding the consolidation of Airwave inJanuary-March 2007 and Endemol in January-June 2007. Revenues include the impact in Telefónica España of the new model for the public use telephone service (-147.4 million euros in2007). In OIBDA and OI, the impact of asset disposals (Airwave, Endemol and Sogecable) is excluded from both periods.

2 Excluding the impact of asset disposals (Airwave, Endemol y Sogecable) in both periods and the impact of the impairment charge taken by Telco, SpA's on its investment of Telecom Italia.3 Market capitalisation as of 25 February 2009.4 2007 base figures exclude Airwave and Endemol and include the consolidation of TVA in October-December 2007. The revenues of T. España are adjusted to reflect the new business model

for public telephony service revenues. As a result, Group revenues have been adjusted to reflect this new model. The 2008 figures include TVA, Deltax and Telemig (since April 2008).Telefónica's CapEx does not include the Real Estate Efficiency Programmes. The growth provided for 2008 guidance assumes constant exchange rates from 2007. In terms of guidancecalculations, OIBDA and OI exclude exceptional revenues and expenses not foreseeable in 2007.

• The Company has announced itsguidance for 20095, which reflects theCompany's ability to flexibly manageOpEx and CapEx in the current economicenvironment. In 2009 the focus will be on preserving strong cash flowgeneration in markets with a morecomplex economic outlook while at the same time exploiting the growthpotential of growing markets. Telefónica expects:

- Significant year-on-year growth in consolidated operating cash flow (OIBDA-CapEx) in the range of +8%/+11%;

- Year-on-year consolidated OIBDAgrowth in the range of +1%/+3%;

- Consolidated revenue growth;

- CapEx is expected to be below 7,500 million euros.

• 2008 Base figures for financial targets:

- Operating cash flow (OIBDA-CapEx):14,201 million euros;

- Consolidated OIBDA: 22,602 million euros;

- Consolidated revenues: 57,946 million euros;

- Consolidated CapEx: 8,401 million euros.

• The strong cash flow generationexpected for 2009 has permitted theCompany to increase the dividendcorresponding to 2009 fiscal year to a total amount of 1.15 euros per share, up 15% from the dividend of 1 euro pershare to be paid against 2008 results.This proposal confirms Telefónica’scommitment to prioritize shareholders

returns for the use of its free cash flow and to progressively increase the dividend per share.

• The Company maintains its target toreach an EPS6 of 2.304 euros and a FCFS7

of 2.87 euros in 2010.

The Company has conducted a sensitivityanalysis to assess the impact of thechanges in the trading environment,reflecting an extreme scenario for 2010(extrapolating the strong depreciation of some currencies versus the euro and current economic weakness). Under this extreme scenario, 2010 EPS6 would stand at 2.10 euros and 2010 FCFS7 would reach 2.50 euros.

Telefónica España:

• The Company maintained its competitive strength in the market, with 47.3 million accesses (an increase of +2.0% year-on-year):

- Telefónica maintained its leadership in the broadband market, with anestimated market share around 57%.Retail broadband Internet accessesstood at over 5.2 million (+13.7% year-on-year), with a solid performance inbroadband ARPU (-3.9% year-on-year)over the year.

- The number of pay TV subscriberstopped 612,000, up 19.8% on December2007 and increasing the Company’sestimated market share to 14%.

- In a market characterised by a highpenetration rate, Telefónica achieved anoteworthy 6.8% year-on-year growthin its mobile contract customer base,driving the total customer baseto more than 23.6 million lines (anincrease of 3.4% from a year earlier).

• In adverse economic conditions, theresults achieved in 2008 underline theefficiency improvements attained andthe Company’s focus on maintainingmargins and cash generation:

- Revenues grew 1.5% on like-for-like8

terms in 2008, compared with the2008 target of 2.0% to 3.5% growth,reflecting the overall slowdown of the market and the lower usage in some segments. Particularlynoteworthy were the sharp rise inwireline Internet and broadbandrevenues (+8.7%) and the jump inmobile connectivity data revenues(+65.2% versus 2007), which pushed up mobile data revenues by 14.8%.

- OIBDA increased by 8.9% from 2007,with the margin improving by 3.7percentage points to 49.4%, meetingthe announced growth targets despitethe pressure on revenues. Thus, OIBDAgrowth, under the criteria used toestablish the financial targets for 2008, stood at 7.0%, within the target range of 6% - 8%.

- Operating cash flow (OIBDA-CapEx)increased by 14.3% year-on-year in 2008 to 8,077 million euros,underlining the Company’s ability to manage its investment.

Telefónica Latinoamérica:

• Telefónica Latinoamérica ended 2008with a solid set of commercial results,underpinned by the dynamism of thetelecommunications market in theregion, which again registered stronggrowth in the fourth quarter:


5 2008 adjusted figures for guidance excludes Sogecable capital gain (143 million euros) and the application of provisions made in T. Europe in respect of potential contingencies derivingfrom the past disposal of shareholdings, one these risks had dissipated or had not materialized (174 million euros), includes 9 months of consolidation of Telemig in T. Latam. 2009 figuresfor guidance assume 2008 constant FX (average FX in 2008). In terms of guidance calculation, OIBDA exclude capital gains and losses from sale of companies and write-offs. Group CapExexcludes Real Estate Efficiency Program of T. España and spectrum licenses.

6 Reported EPS7 FCF available to remunerate Telefonica S.A. shareholders, to protect solvency levels and to accommodate strategic flexibility.8 Including the impact on Telefónica España of the new model for public use telephone service (147.4 million euros in the period from January to December 2007).

- Telefónica Latinoamérica increased itscustomer base by 18% from 2007 toover 158 million accesses in the region.

- Strong levels of commercial activity inthe wireless market led to 18.9 millionorganic net adds in 20089, driven bythe higher number of gross adds andby churn contention. The total wirelesscustomer base increased by 18.1% in organic terms10, to 123.4 millionaccesses. Outgoing ARPU grew 0.9% in constant currency11, despite the sharp rise in the customer base.

- In broadband, net adds topped one million in 2008, bringing totalaccesses to more than 6 million(+20.5% year-on-year), while pay TVcustomers surpassed 1.5 million andwireline access increased by 1.0% fromDecember 2007. Average revenue perfixed telephony access increased by a solid 6.4% in constant euros.

• Telefónica Latinoamérica consolidated its position as the Group’s growth driverin 2008, exceeding the growth targetsannounced at the start of the year12:

- In accordance with the guidancecriteria, year-on-year revenue growthstood at 14.2%, compared with a targetof +11%/+14%, while OIBDA advanced17.6%, well ahead of the +12%/+16%growth target.

- The pace of organic revenue growth13

remained strong over the year (+12.9%), with organic OIBDA growth13

accelerating sharply in the fourthquarter (+21.5% in 2008, +15.6% in the first nine months).

- Telefónica Latinoamérica reportedoperating cash flow (OIBDA-CapEx) of 4,415 million euros in 2008, up 21.8% from 2007 in constant euros.

Telefónica Europe:

• Telefónica Europe increased its totalmobile base in 2008 by 2.9 million lines,to reach 41.2 million mobile customers atthe end of the year (+7.6% year-on-year).

• Telefónica Europe had a strong financialperformance in 2008, with financialtargets successfully achieved in a worseeconomic environment:

- Under guidance criteria, revenuegrowth in 2008 reached 5.9%14

year-on-year, within the 4%-7%announced guidance, and reflected a more balanced contribution from the different businesses:

• Total revenue for Telefónica O2 UKhad a strong 10.6% year-on-yeargrowth in local currency in 2008,outperforming the mobile market on a leading contract churn rate and focused commercial approacharound Simplicity and iPhone.

• In the fourth quarter of 2008Telefónica O2 Germany returned to positive year-on-year growth inmobile service revenues (+0.7%) in a very competitive environment. The business ended the year with a total revenue growth of 1.5% year-on-year with the foundations of the business on track and a newcommercial approach set in the last quarter of the year.

• The businesses in the CzechRepublic, Slovakia and Ireland wereparticularly active in the fourthquarter of the year, reinforcingimproving trends for the future.

- Under guidance criteria, OIBDA rose4.7%14 in the year, meeting the 2%-6%guidance. In 2008 the OIBDA marginstood at 29.2%, broadly unchanged from 2007 in like-for-like15 terms, asefficiency measures taken in 2007 and 2008 pay off, as well as morefocused commercial activity.

• Operating cash flow (OIBDA-CapEx) grew6.7% year-on-year in like-for-like15 terms,despite increased investment in Germany.

Financial Highlights


9 The Telemig customers incorporated by the Group in April 2008 (close to 4 million) are not included as net adds in the period.10 Including Telemig's accesses in December 2007.11 Including Telemig in April-December 2007.12 Assuming constant exchange rates of 2007. In terms of guidance calculation OIBDA and OI exclude other exceptional revenues/expenses not foreseeable. 2007 base figures include the

consolidation of TVA in October-December 2007.13 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and Telemig in April-December 2007.14 Assuming constant exchange rates and excluding the consolidation of Airwave in the first quarter of 2007.15 Assuming constant exchange rates and excluding the consolidation of Airwave in the first quarter of 2007. Capital gain from the sale of Airwave is also excluded, as well as gains related to

the real estate sale in the Czech Republic, restructuring and similar charges and the result of the application of provisions made in respect of potential contingencies deriving from the pastdisposal of shareholdings, once these risks had dissipated or had not materialized.


Market Size

MexicoMobile 15,331

Fixed Wireless: 134

EcuadorMobile 3,123

Fixed Wireless: 89

BrazilFixed Telephony: 11,662

Internet & Data: 3,626

Mobile 44,945

Pay TV472

UruguayMobile 1,421

ChileFixed Telephony: 2,121

Internet & Data: 744

Mobile 6,875

Pay TV263

ArgentinaFixed Telephony: 4,603


Mobile 14,830

Central AmericaFixed Telephony: 437

Internet & Data: 18

Mobile 5,702

SlovakiaMobile 455

PeruFixed Telephony: 2,986


Mobile 10,613

Pay TV654

VenezuelaMobile 10,584

Fixed Wireless: 1,313

Pay TV9

United KingdomMobile 19,470


IrelandMobile 1,728

Czech RepublicFixed Telephony: 1,893


Mobile 5,257

Pay TV114

GermanyMobile 14,198


MoroccoMobile 7,427

Fixed Wireless: 7

SpainFixed Telephony: 15,326


Mobile23,605

Pay TV612

ColombiaFixed Telephony: 2,299


Mobile 9,963

Pay TV142

(Data in thousands accesses)


Telefónica Group Accesses

January - DecemberUnaudited figures (thousands) 2008 2007 % Chg

Final Clients Accesses 255,451.4 226,119.4 13.0

Fixed telephony accesses142,930.8 43,433.6 (1.2)

Internet and data accesses 14,654.3 13,156.6 11.4

Narrowband 1,997.2 2,678.7 (25.4)

Broadband212,472.1 10,320.2 20.9

Other3185.0 1,57.7 17.3

Mobile accesses4195,598.9 167,781.1 16.6

Pay TV 2,267.5 1,748.1 29.7

Wholesale Accesses 3,433.0 2,624.2 30.8

Unbundled loops 1,748.1 1,396.5 25.2

Shared ULL 602.3 776.4 (22.4)

Full ULL 1,145.8 620.1 84.8

Wholesale ADSL5534.7 571.7 (6.5)

Other61,150.1 656.0 75.3

Total Accesses 258,884.4 228,743.6 13.2

1 PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company's accesses for internal use and total fixed wireless included.2 ADSL, satellite, optical fibre, cable modem and broadband circuits.3 Remaining non-broadband final client circuits.4 Includes accesses of Telemig from April 2008.5 Includes Unbundled Lines by T. Deutschland.6 Circuits for other operators. Includes Wholesale Line Rental (WLR).

Notes:• Iberbanda accesses are included from December 2006.• As of 31 December 2006, Group accesses have been reclassified, including ‘fixed wireless’ accesses under the caption of fixed telephony. These accesses were previously classified, depending

on the country, under mobile or fixed accesses.• As of 1 January 2008, ‘fixed wireless’ public telephony accesses are included under the caption of fixed telephony accesses.

Market Size


In a complex operating environment, thesolid commercial and financial resultsrecorded by the Telefónica Group confirmthe benefits of its differential profile: highbusiness diversification, integratedoperations in key markets, competitivestrength in main markets, strong executionskills and financial strength.

In 2008 the Telefónica Group delivered solidgrowth rates in organic terms excludingcapital gains1, with growth acceleratingfrom revenues down through OI. At thesame time, the Company's focus onmaximising efficiency and cash generationresulted in operating cash flow growth (inorganic terms, excluding capital gains)outpacing revenue and OIBDA growth by13.3 percentage points and 5.5 percentagepoints respectively.

The strong rise in organic1 revenuesreflects the Company's success incapturing growth in its markets in 2008.As a result, the intense commercial activityrecorded in 2008 enabled it to increasetotal accesses by 13.2% versus 2007 toaround 259 million. This growth was drivenby the increases in wireless (+16.6%),broadband (+20.9%) and pay TV (+29.7%)accesses. By region, the contribution byTelefónica Latinoamérica is especiallynoteworthy, with over 158 million accessesacross the region at the end of December(up 18.0% on December 2007).

By access type, the Telefónica Group'swireless accesses stood at approximately196 million at the end of 2008, with 6.7million net adds in the fourth quarter and

around 24 million2 in the full year. The main countries contributors to net adds were Brazil (7.52 million), Mexico (2.8 million), Peru (2.5 million) and Germany (1.7 million).

Consolidated Results

Telefónica Group organizationalrestructuring by Regional Business Units:Telefónica España, Telefónica Latinoaméricaand Telefónica Europe, in accordance with the new regional and integratedmanagement model, defines that thecompanies legal structure is not relevant for the presentation of the Telefónica Group financial information. In this sense, operating results of each regional business units are presentedindependently of their legal structure.

In line with this new structure, TelefónicaGroup has incorporated in Telefónica España and Telefónica Latinoaméricaregional businesses units all theinformation corresponding to fixed, cellular,cable, Internet and Television businesses.

Likewise, Telefónica Europe includesTelefónica O2 UK, Telefónica O2 Germany,Telefónica O2 Ireland, Telefónica O2 CzechRepublic and Telefónica O2 Slovakia results.

In the caption ‘Other companies andEliminations’ Atento together with othercompanies and eliminations in theconsolidation process are included.

For the presentation of the reporting by regions, revenue and expenses arisingfrom the use of the trademark andmanagement contracts that do not affect the Group's consolidated results have been eliminated from the operatingresults of each Group region.

From December 31, 2006 Group's accesseshave been reclassified, being fixed wirelessaccesses now included within the fixedtelephony accesses. Till December 2007fixed wireless accesses were included,depending on the country, in mobile or fixed accesses. As from January 1, 2008,the fixed wireless accesses include publictelephones with this technology.

Additionally, in order to provide comparableinformation, Iberbanda's accesses, aTelefónica España's subsidiary, have beenincluded in the total accesses of TelefónicaGroup effective from 31st December 2006.

Moreover, in Latinoamérica, year-on-yearorganic growth rates including Telemigresults for the period April-December 2007 are provided, with the bestcomparable information available at the closing of this document.

1 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and Telemig in April-December 2007. Excluding the consolidation of Airwave inJanuary-March 2007 and Endemol in January-June 2007. In revenues, the impact in Telefónica España of the new model for the public use telephone service (-147.4 million euros in 2007) isincluded. In OIBDA and OI, the impact of asset disposals (Airwave, Endemol and Sogecable) is excluded from both periods.

2 The Telemig customers incorporated by the Group in April 2008 (close to 4 million) are not included as net adds in the period.



Retail internet broadband accesses stood ataround 12.5 million, a year-on-year increaseof 21%, driven by the growing penetration of voice, ADSL and pay-TV bundles. In fact, inSpain over 85% of retail broadband accessesare bundled as part of some kind of dual or triple service package while in LatinAmerica 49% of retail broadband accessesare bundled as part of Duo or Trio packages.In the fourth quarter net adds amounted to 0.4 million accesses, with a total of 2.1million accesses in the full year, of which 1.0 million originated in Latin America, 0.6million in Spain and 0.5 million in Europe.

Pay TV accesses stood at over 2.2 million at the end of 2008, up almost 30% on theprior year, driven by net adds of 109,500 in the fourth quarter and some 519,500 in the year. At the end of 2008 the Company offered pay TV services in Spain,the Czech Republic, Peru, Chile, Colombia, Brazil and Venezuela.

The growth of the customer base andinitiatives to boost usage led to revenues of57,946 million euros in 2008, with similargrowth in the full year (+2.7%) and thefourth quarter (+2.6%). In 2008, thenegative impact of the exchange rateseroded 3 percentage points of revenuegrowth, while changes in the consolidationperimeter reduced top-line growth by afurther 1.2 percentage points.

In organic terms3, revenue growth remainedvirtually unchanged from September,standing at 6.9% in 2008 (+7.0% in January-September 2008), mainly driven by the significant expansion in TelefónicaLatinoamérica (4.6 percentage pointscontribution to growth) and, to a lesserdegree, in Telefónica Europe (1.5 percentagepoints contribution to growth). By service,wireless service revenues, underpinned by a growing contribution from data services,wireline broadband and pay-TV were againthe main drivers of organic revenue growth.

In absolute terms, Telefónica Latinoaméricaaccounted for 38.3% of total Group revenues

in 2008 (+2.7 percentage points from 2007), with Telefónica España and Telefónica Europe accounting for 36.0% and 24.7%, respectively.

Operating expenses declined 2.3% year-on-year in 2008 to 36,553 million euros. Stripping out the impact of currencymovements, operating expenses would haverisen 0.9% year-on-year, consolidating thedeclining trend noted since the start of theyear as a result of initiatives to maximiseefficiency in both years.

Supply costs incurred in 2008 totalled 17,818 million euros, down 0.5% year-on-year.Excluding the impact of foreign exchangefluctuations, these costs would have risen3.6%, mainly due to higher interconnectionexpenses at Telefónica Latinoamérica andTelefónica O2 UK.

Personnel expenses fell 14.3% year-on-yearto 6,762 million euros (-12.4% in constanteuros), in large part due to workforcerestructuring expenses reported in 2007(1,199 million euros). The average headcountduring the period was 251,775, a net increaseof 7,723 employees, mainly due to expansionof the Atento Group's workforce. Excludingthe Atento Group workforce, the averageheadcount at the Telefónica Group fell by 2,218 from 2007, in part due to thedeconsolidation of Endemol and Airwave, to 124,885 employees.

External service expenses (10,079 millioneuros) rose 0.9% year-on-year (+3.7% inconstant currency), mainly due to higherexpenses in Telefónica Latinoamérica,primarily in Brazil, Venezuela and Chile dueto outsourcing activities and commissionsand higher customer acquisition andretention costs at Telefónica Europe.

Gains on sales of fixed assets in 2008totalled 292 million euros, mainly relatedwith capital gains recognised on the sale of the stake in Sogecable (143 million euros)and gains from Real Estate programmes at Telefónica España and Telefónica Europe.

It is worth recalling that in 2007 theCompany recognised the capital gainsrealised on the disposal of Airwave (1,296 million euros) and Endemol (1,368 million euros) in the second and third quarters respectively.

The sound revenue performance and costcontrol are reflected in operating incomebefore depreciation and amortisation(OIBDA), which amounted to 22,919 millioneuros in 2008 (+0.4% versus 2007). In thefourth quarter of 2008 OIBDA grew byaround 29% year-on-year reflecting thepositive impact from the provision of 900million euros for workforce restructuringplans registered in the previous year.

In organic terms4, OIBDA grew 2.8% in 2008. However, organic OIBDA excludingcapital gains5 would have grown 14.7% in2008, outpacing revenue growth by 7.8percentage points, with this gap wideningfrom September mainly due to theaforementioned workforce restructuringprovisions reported in the fourth quarter of 2007. Telefónica Latinoamérica (+7.7percentage points) and Telefónica España(+4.2 percentage points) were the maincontributors to this growth.

In absolute terms, OIBDA at TelefónicaEspaña accounted for almost 45% of totalGroup OIBDA, compared to 36.8% and 18.2% at Telefónica Latinoamérica andTelefónica Europe respectively.

The OIBDA margin in 2008 stood at 39.6% (compared to 40.4% in 2007, mainlydue to capital gains on the disposals ofAirwave and Endemol).

In organic terms, and excluding capitalgains5, the OIBDA margin was 38.7% in2008, up 2.6 percentage points year-on-year,driven by efficiency gains and economies of scale, in a context of high commercialactivity and transformation of the wirelinebusiness in Latin America.

3 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and Telemig in April-December 2007. Excluding the consolidation of Airwave inJanuary-March 2007 and Endemol in January-June 2007. In revenues, the impact in Telefónica España of the new model for the public use telephone service (-147.4 million euros in 2007) is included. In OIBDA and OI, the impact of asset disposals (Airwave, Endemol and Sogecable) is excluded from both periods.

4 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and Telemig in April-December 2007. Excluding the consolidation of Airwave in January-March 2007 and Endemol in January-June 2007.


Depreciation and amortisation in 2008totalled 9,046 million euros, down 4.1%year-on-year. Telefónica Europe includes the amortisation of the purchase priceallocation made following the O2 Groupacquisition (689 million euros) and theTelefónica O2 Czech Republic acquisition (131 million euros). In organic terms4 theTelefónica Group's depreciation andamortisation charges for the full year fell0.9% from 2007, with Telefónica España and Telefónica Europe chiefly responsible for this decline.

Operating income (OI) totalled 13,873million euros in 2008, down 3.6% on 2007,due to recognition of the aforementionedcapital gains on the sale of Airwave andEndemol. In organic terms4, operatingincome would have increased by 5.6%.Stripping out also the impact related withSogecable, Endemol and Airwave disposalsfrom both periods, operating income would grow 28.7% year-on-year.

Accordingly, growth accelerated in organicterms and excluding capital gains5, fromrevenue through operating income (revenueup 6.9%, OIBDA up 14.7%, and OI up 28.7%).

The net profit from associated companiesamounted to -161 million euros in 2008(versus a profit of 140 million euros in2007). Results for 2008 include the impactof the impairment charge taken by Telco,S.p.A.'s on its investment in Telecom Italia.To estimate the impact, the TelefónicaGroup considered the synergies to beobtained by improving certain processes in its European operations through thealliances reached with Telecom Italia S.p.A.The Company has recorded a 209 millioneuros loss in this respect (146 million euros after the related tax effect atTelefónica, S.A.).

Net financial results in 2008 amounted to 2,797 million euros, down 1.6% versus2007, mainly due to:

• On the one hand, the decrease of 7.6% inthe average debt, which has generatedsavings of 240 million euros. Also a 93million euros positive impact has been registered, 9 million euros higherthan the figure reported in 2007, due to changes in the actual value ofcommitments derived mainly from the pre-retirement programmes andother positions equally accounted atmarket value.

• On the other hand, an increase of theaverage cost of the Group's debt, to 6.0%over total average debt excluding foreignexchange results, that leads to a higherexpense of 218 million euros due tohigher interest rates in 2008.

Free cash flow generated by the TelefónicaGroup in 2008 amounted to 9,145 millioneuros of which 2,224 million euros wereassigned to Telefonica's share buybackprogram, 4,165 million euros to TelefónicaS.A. dividend payment and 920 millioneuros to commitment cancellations derived mainly from the pre-retirementsprogrammes. Financial and Real Estate netinvestments for the period amounted to1,327 million euros mainly due to theTelefonica Chile minority stake purchase,the increase of our participation in ChinaUnicom, the Telemig purchase and the saleof Sogecable´s participation. Because ofthese effects, net financial debt decreasedin 508 million euros. Also, net debt wasreduced by an additional 2,043 million eurosbecause of the foreign exchange impact,changes in the consolidation perimeter and other effects on financial accounts. Allthis has led to a decrease of 2,551 millioneuros with respect to the net financial debtat the end of 2007 (45,284 million euros),leaving the net financial debt of theTelefónica Group at December 2008 at 42,733 million euros.

Leverage ratio, net debt over OIBDA,continues to fall down to 1.89 times atDecember 2008 versus 1.91 times atSeptember 2008, thanks to both thereduction of the net financial debt in theperiod and to an increase in the OIBDAfigure. In the fourth quarter of the year, the ratio has decreased albeit the dividendpayment disbursement on November andthe payment of the acquisitions alreadycommitted (basically the increase in China Unicom's stake and Telefonica Chile minority's stake acquisition).

During the year 2008, the financing activityof Telefónica Group, excluding short termCommercial Paper Programmes activity, roseto above 3,000 million euros, less intensecompared to previous periods due to theinstability of the credit markets and theGroup's liquidity position. Included in thisamount, we highlight the euro bondissuance for an amount of 1,250 millionsraised by Telefónica last June.

Telefónica S.A. and its holding companieshave continued active in 2008 under itsvarious Commercial Paper Programmes(Domestic and European), for anoutstanding balance of 1,586 million euros,maintaining spreads over reference rates.

Regarding Latin America, our subsidiarieshave tapped the capital markets up toDecember 2008 for an amount of close to 1,800 million equivalent euros, mainlyrenewing existing debt.

As of December 31st, the breakdown ofconsolidated financial debt was 57% bonds and debentures and 43% debt with financial institutions.

Thanks to the 2 billion euro bond issuancelast January 2009, the cash balance coversin excess the debt maturities of the coming12 months, resulting in a negative net debtfigure for 2009, of approximately 400million euros.

5 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and Telemig in April-December 2007. Excluding the consolidation of Airwave in January-March 2007 and Endemol in January-June 2007. In OIBDA and OI, the impact of asset disposals (Airwave, Endemol and Sogecable) is excluded from both periods.


66 Telefónica, S.A. Annual Report 200866 Telefónica, S.A. Annual Report 2008

The solid financial position of the Group hasled the rating agency Fitch to upgrade, onNovember 25th, Telefónica, S.A. long term credit to ‘A-/stable outlook’ fromBBB+/positive outlook’ since Telefónica'soperational and financial profile isaccording to Fitch, comfortably in line withan 'A-'(A minus) rating. On December 2ndthe rating agency Standard & Poor's raisedTelefónica, S.A. long term corporate rating to ‘A-/stable outlook’ from ‘BBB+/positiveoutlook’ reflecting Telefónica's steadydeleveraging over the last year. OnDecember 17th the Japanese rating agencyJCR, also upgraded the rating on the foreign currency long-term senior debts of Telefónica, S.A. to ‘A/stable’prompted by Telefónica's improved leverage ratiosupported by its high profitability and cash generating capacity. Finally, lastFebruary 17th 2009, the rating agencyMoody's has changed the outlook ofTelefónica, S.A. to positive affirming thelong-term Baa1 ratings.

The tax provision for 2008 totalled 3,089 million euros, impliying a tax rate of 28.3%, though cash outflow for theTelefónica Group was lower in 2008 as loss carryforwards generated in previousyears were offset and pending deductionsapplied. It is worth highlighting that in2007 the tax provision was lower, mainly on account of the Endemol disposal whichtriggered a capital loss for tax purposes.

Minority interests grew 10.2% year-on-year,reducing net income for 2008 by 234 million euros. Minority stakes in Telesp andTelefónica O2 Czech Republic accounted forthe bulk of profit attributable to minorityinterests, although year-on-year growth isexplained basically by the higher resultattributed to Vivo's minorities.

In all, consolidated net income in 2008totalled 7,592 million euros, down 14.8% year-on-year. This decline is mainly due to the recognition in 2007 of capital gains onthe sale of Airwave and Endemol. Strippingout the impact of asset disposals (Airwave,Endemol and Sogecable) from both periods,and the impact of the impairment charge

taken by Telco, SpA's on its investment of Telecom Italia, net income growth toDecember 2008 would rise to 38.0%.

Basic earnings per share in 2008 stood at 1,63 euros, with year-on-year growth of 41.4% on a like-for-like basis6.

CapEx in the full year amounted to 8,401million euros, up 4.7% on 2007. This increase was mainly driven by investment in broadband, pay TV and expansion of thecoverage and capacity of wireless networks in Latin America.

Also, the Company's drive to manageoperating expenses and CapEx resulted in a significant increase in operating cash flow (OIBDA-CapEx), which stood at 14,519million euros at the end of 2008, up 20.2%year-on-year in organic terms excludingcapital gains7. By region, Telefónica Españaaccounted for 8,077 million euros of thetotal, while Telefónica Latinoaméricagenerated 4,410 million euros andTelefónica Europe, 2,108 million euros.

In 2008, the Company devoted 69% of thefree cash flow to shareholder remuneration,combining dividend payments and sharebuybacks (126.7 million shares in 2008). The Company expects to complete the share buyback programme announced in2008 (150 million shares) during the firstquarter of 2009.

6 Excluding the impact of asset disposals (Airwave, Endemol y Sogecable) in both periods and the impact of the impairment charge taken by Telco, SpA's on its investment of Telecom Italia.7 Assuming constant exchange rates and including the consolidation of TVA in January-December 2007 and Telemig in April-December 2007. Excluding the consolidation of Airwave in

January-March 2007 and Endemol in January-June 2007. In OIBDA and OI, the impact of asset disposals (Airwave, Endemol and Sogecable) is excluded from both periods.

Telefónica GroupConsolidated Income Statement

January - December October - DecemberUnaudited figures (euros in millions) 2008 2007 % Chg 2008 2007 % Chg

Revenues 57,946 56,441 2.7 14,804 14,426 2.6

Internal exp capitalized in fixed assets 736 708 4.0 207 211 (1.9)

Operating expenses (36,553) (37,431) (2.3) (9,367) (10,381) (9.8)

Supplies (17,818) (17,907) (0.5) (4,607) (4,653) (1.0)

Personnel expenses (6,762) (7,893) (14.3) (1,697) (2,578) (34.2)

Subcontracts (10,079) (9,991) 0.9 (2,607) (2,771) (5.9)

Bad Debt Provisions (748) (666) 12.3 (186) (130) 43.2

Taxes (1,147) (974) 17.8 (271) (249) 8.8

Other net operating income (expense) 510 358 42.6 196 192 2.1

Gain (loss) on sale of fixed assets 292 2,766 (89.4) 56 132 (57.7)

Impairment of goodwill and other assets (12) (17) (30.8) (3) (4) (26.3)

Operating income before D&A (OIBDA) 22,919 22,825 0.4 5,893 4,577 28.8

OIBDA margin 39.6% 40.4% (0.9 p.p.) 39.8% 31.7% 8.1 p.p.

Depreciation and amortization (9,046) (9,437) (4.1) (2,243) (2,452) (8.5)

Operating income (OI) 13,873 13,388 3.6 3,650 2,125 71.8

Profit from associated companies (161) 140 c.s. (180) 34 c.s.Net financial income (expense) (2,797) (2,844) (1.6) (698) (749) (6.8)

Income before taxes 10,915 10,684 2.2 2,771 1,409 96.7

Income taxes (3,089) (1,565) 97.3 (715) (294) 143.1

Income from continuing operations 7,826 9,119 (14.2) 2,057 1,115 84.4

Income (Loss) from discontinued ops, 0 0 n.m. 0 0 n.m.Minority interest (234) (213) 10.2 (61) (57) 6.8

Net income 7,592 8,906 (14.8) 1,996 1,058 88.6

Weighted average number of ordinary shares 4,645,9 4,758,7 (2.4) 4,592,6 4.718,5 (2.7)

outstanding during the period (millions)

Basic earnings per share (euros) 1.63 1.87 (12.7) 0.43 0.22 93.8

Notas:• For the basic earnings per share calculation purposes, the weighted average number of ordinary shares outstanding during the period have been obtained applying IFRS rule 33 ‘Earnings

per share’. Thereby, there are not taking into account as outstanding shares the weighted average number of shares held as treasury stock during the period. Excluding the impact of assetdisposals (Airwave and Sogecable) and the impact of the impairment charge taken by Telco, SpA’s on its investment of Telecom Italia in both periods, net income grows 38.0% and EPSgrows 41.4% as of the end of December 2008.

• Airwave and Endemol are not consolidated since the second and third quarter of 2007, respectively. The disposal of Airwave generated a capital gain of 1,296 million euros, recorded in thesecond quarter of 2007. The disposal of Endemol generated a capital gain of 1,368 million euros, recorded in the third quarter of 2007.

• 2008 includes 174 million euros due to the application of provisions made in respect of potential contingencies deriving from the past disposal of shareholdings, once these risks haddissipated or had not materialized.

• Sogecable capital gain amounting 143 million euros is recorded in the second quarter of 2008. • Starting April 2008, Vivo consolidates Telemig.• Excluding the impact of asset disposals, organic OIBDA growth reaches 14.7% and organic OI growth reaches 28.7% in the period January-December 2008.

Financial Data


Financial Data


Telefónica GroupResults by regional business units

Revenues OIBDA OIBDA margin January - December January - December January - December

Unaudited figures (euros in millions) 2008 2007 % Chg 2008 2007 % Chg 2008 2007 % Chg

Telefónica España120,838 20,683 0.7 10,285 9,448 8.9 49.4% 45.7% 3.7 p.p.

Telefónica Latinoamérica222,174 20,078 10.4 8,445 7,121 18.6 38.1% 35.5% 2.6 p.p.

Telefónica Europe314,308 14,458 (1.0) 4,180 4,977 (16.0) 29.2% 34.4% (5.2 p.p.)

Other companies and eliminations4625 1,221 (48.8) 9 1,278 (99.3) n.m. n.m. n.m.

Total Group1 2 3 457,946 56,441 2.7 22,919 22,825 0.4 39.6% 40.4% (0.9 p.p.)

Operating income CapEx OpCF (OIBDA-CapEx)January - December January - December January - December

2008 2007 % Chg 2008 2007 % Chg 2008 2007 % Chg

Telefónica España18,046 7,067 13.9 2,208 2,381 (7.3) 8,077 7,067 14.3

Telefónica Latinoamérica24,800 3,562 34.8 4,035 3,343 20.7 4,410 3,778 16.7

Telefónica Europe31,144 1,591 (28.1) 2,072 2,125 (2.5) 2,108 2,852 (26.1)

Other companies and eliminations4(117) 1,168 c.s. 85 178 (52.1) (76) 1,100 c.s.

Total Group1 2 3 413,873 13,388 3.6 8,401 8,027 4.7 14,519 14,797 (1.9)

Notes:• OIBDA and OI are presented bebore brand fees and management fees.• CapEx at cumulative average exchange rate. • OIBDA margin calculated as OIBDA over revenues.

1 2008 figures reflect the new applicable framework for public telephony services (net revenues). 2007 figures reported figures have not changed (gross revenues and gross expenses).Therefore, 2008/2007 variations are not homogeneous.

2 Starting April 2008, Vivo consolidates Telemig.3 Airwave is not consolidated since the second quarter of 2007 (the disposal of Airwave generated a capital gain of 1,296 million euros, recorded in the second quarter of 2007). 2008 includes

174 million euros due to the application of provisions made in respect of potential contingencies deriving from the past disposal of shareholdings, once these risks had dissipated or hadnot materialized.

4 Endemol is not consolidated since the third quarter of 2007 (the disposal of Endemol generated a capital gain of 1,368 million euros, recorded in the third quarter of 2007). Sogecablecapital gain amounting 143 million euros is recorded in the second quarter of 2008.


Telefónica Group Consolidated balance sheetUnaudited figures (euros in millions) Dec 2008 Dec 2007 % Chg

Non-current assets 81.923 87.395 (6.3)

Intangible assets 15.921 18.320 (13.1)

Goodwill 18.323 19.770 (7.3)

Property, plant and equipment and Investment property 30.546 32.469 (5.9)

Non-current financial assets and investments in associates 10.153 9.007 12.7

Deferred tax assets 6.980 7.829 (10.8)

Current assets 17,973 18,478 (2.7)

Inventories 1,188 987 20.4

Trade and other receivables 9,315 9,662 (3.6)

Current tax receivable 970 1,010 (4.0)

Current financial assets 2,216 1,622 36.7

Cash and cash equivalents 4,277 5,065 (15.6)

Non-current assets classified as held for sale 7 132 (94.8)

Total Assets = Total Equity and Liabilities 99,896 105,873 (5.6)

Equity 19,562 22,855 (14.4)

Equity attributable to equity holders of the parent 17,231 20,125 (14.4)

Minority interest 2,331 2,730 (14.6)

Non-current liabilities 55,202 58,044 (4.9)

Long-term financial debt 45,088 46,942 (4,0)

Deferred tax liabilities 3,576 3,926 (8.9)

Long-term provisions 5,421 6,161 (12.0)

Other long-term liabilities 1,117 1,015 10.1

Current liabilities 25,132 24,974 0.6

Short-term financial debt 8,100 6,986 15.9

Trade and other payables 7,939 8,729 (9.1)

Current tax payable 2,275 2,157 5.5

Short-term provisions and other liabilities 6,818 7,102 (4.0)

Financial Data

Net Financial Debt 142,733 45,284 (5.6)

1 Net Financial Debt = Long term financial debt + Other long term liabilities + Short term financial debt - Short term financial investments - Cash and cash equivalents - Long term financialassets and other non-current assets.

Financial Data


Telefónica GroupFree cash flow and change in debt

January - DecemberUnaudited figures (euros in millions) 2008 2007 % Chg

I Cash flows from operations 20,571 20,132 2.2

II Net interest payment1(2,781) (3,097)

III Payment for income tax (1,413) (1,457)

A=I+II+III Net cash provided by operating activities 16,377 15,578 5.1

B Payment for investment in fixed and intangible assets (7,861) (7,205)

C=A+B Net free cash flow after CapEx 8,516 8,373 1.7

D Net Cash received from sale of Real Estate 248 129

E Net payment for financial investment (1,575) 2,383

F Net payment for dividends and treasury stock2(6,681) (5,496)

G=C+D+E+F Free cash flow after dividends 508 5,389 (90.6)

H Effects of exchange rate changes on net financial debt (2,142) (819)

I Effects on net financial debt of changes in consolid. and others 99 (653)

J Net financial debt at beginning of period 45,284 52,145

K=J-G+H+I Net financial debt at end of period 42,733 45,284 (5.6)

1 Including cash received from dividends paid by subsidiaries that are not under full consolidation method.2 Dividends paid by Telefónica S.A. and dividend payments to minoritaries from subsidiaries that are under full consolidation method and treasury stock.


Reconciliations of cash flow and OIBDA minus CapEx


OIBDA 22,919 22,825 0.4

- CapEx accrued during the period (8,401) (8,027)

- Payments related to cancellation of commitments (920) (781)

- Net interest payment (2,781) (3,097)

- Payment for income tax (1,413) (1,457)

- Results from the sale of fixed assets (292) (2,766)

- Investment in working capital and other deferred income and expenses (597) 1,676

= Net free cash flow after CapEx 8,516 8,373 1.7

+ Net Cash received from sale of Real Estate 248 129

- Net payment for financial investment (1,575) 2,383

- Net payment for dividends and treasury stock (6,681) (5,496)

= Free Cash Flow after dividends 508 5,389 (90.6)


Net free cash flow after CapEx 8,516 8,373 1.7

+ Payments related to cancellation of commitments 920 781

- Ordinary dividends payment to minoritaries (291) (307)

= Free cash flow 9,145 8,847 3.4

Weighted average number of ordinary shares outstanding during the period (millions) 4,646 4,759

= Free cash flow per share (euros) 1.97 1.86 5.9

Note:The concept ‘Free cash flow’ reflects the amount of cash flow available to remunerate Telefónica S.A. Shareholders, to protect solvency levels (financial debt and commitments), and toaccomodate strategic flexibility.The differences with the caption ‘Net free cash flow after CapEx’ included in the table presented above, are related to ‘Free cash flow’ being calculated before payments related tocommitments (workforce reductions and guarantees) and after dividend payments to minoritaries, due to cash recirculation within the Group.

Financial Data


Net financial debt and commitmentsUnaudited figures (euros in millions) December 2008

Long-term debt145,565

Short term debt including current maturities 8,100

Cash and Banks (4,277)

Short and Long-term financial investments2(6,655)

A Net Financial Debt 42,733

Guarantees to IPSE 2000 365

B Commitments related to guarantees 365

Gross commitments related to workforce reduction34,782

Value of associated Long-term assets4(697)

Taxes receivable5(1,398)

C Net commitments related to workforce reduction 2,687

A + B + C Total Debt + Commitments 45,786

Net Financial Debt / OIBDA61.9x

Total Debt + Commitments/ OIBDA62.0x

Debt structure by currencyDecember 2008

Unaudited figures EUR LATAM GBP CZK USD

Currency mix 65% 14% 9% 7% 5%

Credit ratingsLong-Term Short-Term Perspective Last review

Moody's Baa1 P-2 Positive 17/2/09

JCR A- - Stable 17/12/08

S&P A- A-2 Stable 2/12/08

Fitch/IBCA A- F-2 Stable 25/11/08

1 Includes ‘long-term financial debt’ and 447 million euros of ‘other long-term debt’.2 Short-term investments and 4,438 million euros recorded under the caption of ‘financial assets and other long-term assets’.3 Mainly in Spain. This amount is detailed in the caption ‘Provisions for Contingencies and Expenses’ of the Balance Sheet, and is the result of adding the following items: ‘Provision for Pre-

retirement, Social Security Expenses and Voluntary Severance’, ‘Group Insurance’, ‘Technical Reserves’, and ‘Provisions for Pension Funds of Other Companies’.4 Amount included in the caption ‘Investment’ of the Balance Sheet, section ‘Other Loans’. Mostly related to investments in fixed income securities and long-term deposits that cover the

materialization of technical reserves of the Group insurance companies.5 Net present value of tax benefits arising from the future payments related to workforce reduction commitments.6 Calculated based on December 2008 OIBDA, excluding results on the sale of fixed assets.


Telefónica GroupExchanges rates applied

P&L and CapEx1 Balance Sheet2

Jan - Dec 2008 Jan - Dec 2007 December 2008 December 2007

USA (US Dollar/Euro) 1.463 1.368 1.392 1.472

United Kingdom (Sterling/Euro) 0.795 0.685 0.952 0.733

Argentina (Argentinean Peso/Euro) 4.632 4.263 4.806 4.636

Brazil (Brazilian Real/Euro) 2.659 2.661 3.252 2.608

Czech Republic (Czech Crown/Euro) 24.969 27.756 26.930 26.620

Chile (Chilean Peso/Euro) 758.725 714.637 885.740 731.472

Colombia (Colombian Peso/Euro) 2,873.563 2,837.126 3,125.000 2,965.928

El Salvador (Colon/Euro) 12.806 11.974 12.177 12.881

Guatemala (Quetzal/Euro) 11.069 10.502 10.830 11.234

Mexico (Mexican Peso/Euro) 16.239 14.953 18.841 15.996

Nicaragua (Cordoba/Euro) 28.365 25.229 27.623 27.827

Peru (Peruvian Nuevo Sol/Euro) 4.285 4.282 4.371 4.409

Uruguay (Uruguayan Peso/Euro) 30.605 32.101 33.888 31.724

Venezuela (Bolivar/Euro) 3.147 2.942 2.992 3.165

1 These exchange rates are used to convert the P&L and CapEx accounts of the Group foreign subsidiaries from local currency to euros. 2 Exchange rates as of 31/December/08 and 31/December/07.

At the end of 2008, Telefónica España managed 47.3 million accesses, a year-on-year increase of 2.0%, boosted by a 3.4% advance in mobile accesses(to over 23.6 million) and 13.7% growth in wireline retail broadband Internetaccesses to over 5.2 million.

The results achieved in 2008 underscoreTelefónica's management capacity in amarket that has clearly showed its moredefensive profile in the face of a worseeconomic environment. Accordingly, thesoundness of a business model thatleverages the advantages of being anintegrated operator, with a strong positionin the highest value segments, themeasures adopted in 2007 to enhanceefficiency and the Company's ability tomanage OpEx and CapEx are reflected in anincreasing growth throughout the P&L anda sharp increase in operating cash flow.

Revenues grew 0.7% in 2008 to 20,838million euros. On a like-for-like basis1,revenues performance in the fourth quarter (-0.9%) was in line with the growthrecorded in the third quarter once excludedthe impact from the Universal ServiceObligation (-0.8%), to post a like-for-likegrowth of 1.5% in the full year.

It is worth recalling that a total of 182.2million euros of revenues were accountedfor in the third quarter of 2008 associatedwith the Universal Service Obligation atTelefónica España Wireline Business for the years 2003, 2004 and 2005. This had a positive impact of 50.6 million euros on OIBDA at Telefónica España.

Operating income before depreciation and amortisation (OIBDA) jumped 17.7%year-on-year in the fourth quarter and by 8.9% in 2008 to 10,285 million euros,putting the OIBDA margin at 49.4% for the full year (up 3.7 percentage pointsfrom 2007).

CapEx amounted to 2,208 million euros in 2008, down 7.3% year-on-year, with thepace of the decline accelerating (-19.4%) inthe fourth quarter. This reflects TelefónicaEspaña's commitment to preserving theCompany's strong cash flow generation. In 2008 Telefónica España generatedoperating cash flow (OIBDA-CapEx) of 8,077 million euros, up 14.3% year-on-year.

Wireline business

In the current environment the Spanishwireline access market has continued toexpand, though the year-on-year growthrate fell from 1.9% in the first half to 0.7% at the end of 2008.

Against this backdrop, the Company'swireline telephony accesses topped 15.3million at the end of December 2008 (-3.7%versus December 2007) after registering a net loss of 200,585 lines in the fourthquarter of 2008 and 592,492 in the full year.The main factors behind this decline areloop unbundling, more intense competitionand the shrinking of the market in the lastmonths of 2008. As a result, Telefónica'sestimated share of the wireline accessmarket stood at around 77% in December2008. It is worth noting that of the total number of lines lost in 2008, 83%corresponded to migrations to wholesalelines in any of the existing formats - fullyunbundled loop, naked shared access loopor the recently-created WLR2 - and that theytherefore continue to generate revenues for the Company, while the remaining 17%correspond to lines captured by competitorsvia direct access or a reduction in the size of the market.

The number of pre-selected lines continuedto decline, dropping by 76,702 in the fourthquarter of 2008 and by 331,557 in the fullyear, to less than 1.5 million lines at the endof December 2008.

Telefónica España's estimated share ofwireline traffic remained stable at around 64%.

Results by regional bussines units Telefónica España


1 Including the impact on Telefónica España of the new model for public use telephone service (-147.4 million euros in 2007;-41.3 million euros in the fourth quarter of 2007).

2 WLR: Wholesale Line Rental or AMLT (Alquiler Mayorista de Linea Telefónica) on its Spanish naming. In the fourth quarterof 2008 Telefónica began marketing this resale service which allows alternative operators to provide a single bill to theircustomers, including both the monthly line fee and the traffic consumption. At the end of December 2008 WLR amountedto 9,530 accesses.

The Spanish wireline broadband Internetaccess market registered an estimated 0.3million net adds in the fourth quarter and1.1 million in the full year (1.4 million netadds in 2007). Accordingly, estimated size of the wireline broadband Internet accessmarket reached 9.3 million accesses in2008, up 13.4% on December 2007.

Telefónica's retail broadband Internetaccesses net adds totalled 129,478 in thefourth quarter and 632,402 in the full year(a year-on-year drop of 25.2%), resulting in a 13.7% year-on-year increase in accesses to over 5.2 million. The Company remainsmarket leader with an estimated sharearound 57%.

The estimated share of unbundled loops in the broadband Internet access marketincreased slightly to surpass 18%. Netquarterly adds amounted to 112,842 loops (-2.8% vs. the fourth quarter 2007) and344,102 in the full year (-17.1% from 2007).Total unbundled loops amounted toapproximately 1.7 million, of which 35.5%(602,345) were shared access loops. Theremaining 1,095,697 were fully unbundledloops (including 259,868 naked sharedaccess loops). Fully unbundled loops grewby 150,739 in the quarter, of which 48,540(32.2%) were naked shared access loops.Shared loops fell by 37,897 accesses in the quarter (net loss).

The decline of the wholesale ADSL servicecontinued due to migrations to unbundledloops. Net fourth quarter losses amountedto 21,008 accesses to en end up the yearwith net losses of 71,728 wholesale ADSLconnections. At the end of 2008 totalwholesale ADSL accesses amounted to423,764, down 14.5% from December 2007.

Telefónica had an estimated 14% share of the Pay TV market at year-end, havingadded 22,943 customers in the fourthquarter and 101,407 in 2008, leading to atotal of 612,494 customers (up 19.8% year-on-year).

The total number of Duo and Trio bundlesstood at 4.5 million units. This means thatmore than 85% of the Company's retailbroadband accesses were part of a doubleor triple offer bundle.

Revenues totalled 12,581 million euros in2008, up 1.4% year-on-year, after declining by 2.2% in the fourth quarter. Like-for-likegrowth3 stood at 2.7% in 2008, whilerevenues declined by 0.9% in the fourthquarter. The fourth quarter revenueperformance was due to lower voice servicerevenues, coupled with lower growth ofInternet and broadband revenues.

• Traditional access revenues fell by 1.1%year-on-year in the fourth quarter andamounted to 2,944 million euros in theyear, an increase of 6.2% from 2007.Stripping out the impact of UniversalService Obligation related revenues,revenues would drop 0.4% in the yeardue to lower average accesses, with the same rate of decline in the fourthquarter as in the third quarter.

• Voice service revenues declined 6.2% inthe fourth quarter on like-for-like4 basis(10.4% reported drop) and 3.5% in the fullyear (7.4% reported decrease), reflectinglower fixed-to-mobile traffic, the fall inthe effective prices of international trafficand the increased weighting of flat-ratetraffic in national wireline traffic.

• Internet and broadband revenues grew5.2% in the quarter and totalled 3,017million euros in 2008, up 8.7% versus2007. By item:

- Retail broadband service revenues grew6.3% in the quarter and 11.6% in theyear, contributing 2.2 percentage pointsto revenue growth at Telefónica EspañaWireline Business.

- Improved performance at the wholesalebroadband business, (up 12.5% in thequarter and 2.6% in the year), reflectinggrowth in revenues from a highernumber of unbundled loops.

• Data service revenues rose 2.6% year-on-year in 2008 (up 1.5% in the fourth quarter) to 1,190 million euros.

• IT service revenues fell by 1.8% year-on-year in the fourth quarter and amountedto 443 million euros in the full year, up1.2% from 2007.

Operating expenses fell 21.8% in the fourthquarter to total 6,716 million euros in 2008(-8.5% year-on-year). The full year decline is due to: i) the 5.4% decline in externalservice expenses to 1,336 million euros dueto the new model for the PUT and callcentres business; ii) the 1.5% fall in supplycosts to 2,962 million euros due to lowerinterconnection and equipment purchasingexpenses and special projects; iii) the 21.6% reduction in personnel expenses to 2,071 million euros due to workforcereorganization expenses in 2007 (513 millioneuros; zero in 2008) –stripping out thisimpact, personnel expenses would havefallen by 2.7% in 2008– and the loweraverage headcount in 2008; and iv) thecontribution of 73 million euros to cover theUniversal Service Obligation. On a like-for-like basis5, operating expenses would havedeclined by 6.6% in 2008 and by 20.3% inthe fourth quarter.

Operating income before depreciation andamortisation (OIBDA) rose 20.3% year-on-year in the fourth quarter, reflecting thelower provisions linked to the workforcereorganization programme (397 millioneuros in the fourth quarter of 2007, zero in2008) and the lower real estate capitalgains (1 million euros in October-December2008 and 152 million euros in the sameperiod of 2007).


3 Including the impact on Telefónica España of the new model for public use telephone service (-147.4 million euros in 2007; -41.3 million euros in the fourth quarter of 2007).4 Including the impact on Telefónica España of the new model for public use telephone service (-193.7 million euros in voice service revenues in 2007; -53.7 million euros in the

fourth quarter of 2007).5 Including the impact on Telefónica España of the new model for public use telephone service (-147.4 million euros in 2007; -41.3 million euros in the fourth quarter of 2007).

OIBDA for the full year 2008 amounted to6,050 million euros, up 15.3% from 2007.This growth reflects the following:recognition of the Universal ServiceObligation –with a positive impact of 110million euros in 2008-, lower provisionslinked to the workforce reorganizationprogramme –513 million euros to December2007, zero in 2008-, lower capital gains fromproperty sales –74 million euros in 2008 vs.161 million euros a year earlier–, the sale ofthe bad debt portfolio for 17 million euros in 2008 and a fine levied by the EuropeanUnion for 152 million euros in the secondquarter of 2007.

The OIBDA margin stood at 45.6% in thefourth quarter and 48.1% in the full year.

CapEx fell by 7.2% in 2008 to 1,498 million euros and operating cash flow(OIBDA–CapEx) amounted to 4,552 million euros, up 25.2% year-on-year.

Wireless business

The Spanish wireless market totalled 53.1 million lines at the end of 2008, with an estimated penetration rate of 116% (an increase of more than five percentagepoints from December 2007).

In the context of an increasingly maturemarket and the current economic climate,net adds in 2008 stood at 778,280 lines,with an especially strong performance inthe contract segment, where 923,076 lineswere added. Net adds totalled 168,862 linesin the fourth quarter (406,837 lines in thesame period a year earlier), driven mainly by the contract segment (65% of the total),which registered net adds of 110,358 lines(383,049 in the fourth quarter of 2007).

As a result, Telefónica España’s customerbase in Spain totalled more than 23.6million lines at the end of 2008, up 3.4%year-on-year, driven by the growth rate of the contract segment (+6.8% versusDecember 2007), which represents 61.7% of the total customer base (1.9 percentagepoints more than in December 2007).

In terms of portability, the net balance in 2008 was –61,254 lines, with a positive net balance of 38,750 lines in the contract segment.

In a highly competitive environment, churn in 2008 advanced slightly to 1.9%(+0.1 percentage points versus 2007),standing at 2.0% in the fourth quarter.Churn was significantly lower in thecontract segment (1.3% in the fourthquarter and 1.2% in the full year) despiteincreasing slightly (+0.1 percentage points versus 2007).

In terms of usage, minutes of traffic carried in the fourth quarter grew 4.1% year-on-year to over 65,000 million minutesin the full year (+3.3% versus 2007). MoUamounted to 152 minutes in the fourthquarter (-2.3% year-on-year), broadly in line with the trend in the previous quarter,and to 156 minutes in the year as a whole (-2.8% versus 2007).

Voice ARPU reached 24.1 euros in the lastquarter of 2008, 10.0% lower than in thesame quarter of 2007, and amounted to 25.2 euros in the full year (-8.5% versus2007). This performance was driven by thechange in customer usage patterns in thecurrent economic climate and the sharpdrop in termination rates in April andOctober (-17% year-on-year on cumulativebasis). Outgoing voice ARPU performedbetter than in the third quarter, falling 8.4% year-on-year in the fourth quarter and by 7.4% overall in 2008.

Data ARPU in the last quarter of the yearcontinued the trend seen since the start ofthe year, growing 8.3% year-on-year in thequarter to 5.5 euros and by 9.3% in the fullyear to 5.2 euros. The strong performance ofthe wireless data business was underpinnedby higher content revenues (+9.2% versus2007) and, above all, strong growth inconnectivity revenues, which advanced65.4% year-on-year in the fourth quarterand by 65.2% in the year as a whole.Particularly noteworthy is the growingcontribution of connectivity revenues, whichaccounted for 19.8% of data revenues in2008, up 6.2 percentage points versus 2007.

As a result, total outgoing ARPU amounted to 25.9 euros in 2008, 4.6% less than in 2007.

Total ARPU stood at 30.4 euros at the end of 2008, down 5.9% year-on-year and 7.1% in the last quarter of 2008.

The number of 3G handsets held bycustomers rose steadily to more than 6.2million (1.8 times more than in December2007), reaching a penetration rate of 27% of the customer base excluding M2M (+11.5 percentage points from 2007).

Results by regional bussines unitsTelefónica España


Revenues totalled 9,684 million euros in2008, virtually unchanged from 2007 (-0.1%)and down 1.0% in the fourth quarter due tolower customer usage and lower incomingrevenues. Highlights by revenue item:

• Service revenues remained virtuallyunchanged in 2008 (-0.6% year-on-year)at 8,457 million euros. The year-on-yearchange in the fourth quarter stood at –2.6%, just 0.5 percentage points less than the change reported in theprevious quarter.

- Customer revenues advanced 1.2% in 2008 to 6,943 million euros andremained virtually unchanged in thefourth quarter (-0.3% year-on-year), an improvement on the performancein the previous quarter (-0.8% year-on-year).

- Interconnection revenues fell 9.4%year-on-year in 2008 and by 13.9% inthe fourth quarter, hit by the cut intermination rates (17% in the year).

- Roaming in revenues fell 9.9% versus 2007 following a 16.1% declinein the fourth quarter. This is due toongoing reductions in wholesaleroaming prices.

• Revenues from handset sales grew 3.6%in 2008 to 1,227 million euros, rising 10.9% in the fourth quarter, reflecting thedifferent timing for handset shipments (-1.6% in the third quarter of 2008).

Operating expenses declined by 0.7% year-on-year in 2008 to 5,500 million euros. This performance is affected by personnelreorganization costs registered in the fourthquarter of 2007 (154 million euros) and thecosts related with the Universal ServiceObligation (59 million euros) recorded in the third quarter of 2008. Operatingexpenses in the fourth quarter amounted to 1,389 million euros, down 9.3% on thesame period in 2007 (+0.8% stripping out the aforementioned workforcereorganization expenses).

Operating income before depreciation and amortisation (OIBDA) grew 0.5% in2008 to 4,265 million euros, after increasingby 12.2% in the fourth quarter. The OIBDAmargin stood at 44.0% in the full year, an improvement of 0.3 percentage pointsfrom 2007.

CapEx in 2008 totalled 710 million euros,down 7.4% from 2007, fuelling 2.3% year-on-year growth in operating cash flow (OIBDA–CapEx) to 3,555 million euros.


Telefónica EspañaAccesses

2007 2008

Unaudited figures (thousands) December March June September December % Chg y-o-y

Final Clients Accesses 44,578.2 44,872.9 45,019.7 45,160.7 45,213.6 1.4

Fixed telephony accesses115,918.8 15,842.1 15,670.0 15,526.9 15,326.3 (3.7)

Internet and data accesses 5,321.8 5,468.4 5,547.6 5,608.3 5,670.0 6.5

Narrowband 660.8 589.5 502.3 453.9 388.0 (41.3)

Broadband24,614.0 4,835.9 5,005.0 5,117.0 5,246.4 13.7

Other347.0 43.1 40.4 37.4 35.6 (24.3)

Mobile accesses 22,826.6 23.008.4 23.225.4 23.436.0 23.604.8 3.4

Pre-Pay 9,181.8 9,058.4 8,964.6 8,978,5 9,037.0 (1.6)

Contract 13,644.7 13,950.0 14,260.8 14,457.5 14,567.8 6.8

Pay TV 511.1 554.0 576.6 589.6 612.5 19.8

Wholesale Accesses 1,855.5 1,953.3 2,001,3 2,035,0 2,136,1 15.1

WLR40,0 0.0 0.0 0.0 9.5 n.s.

Unbundled loops 1,353.9 1,467.4 1,532.6 1,585.2 1,698.0 25.4

Shared ULL 776.4 755.0 683.6 640.2 602.3 (22.4)

Full ULL5577.6 712.5 849.1 945.0 1,095.7 89.7

Wholesale ADSL 495.5 480.3 463.3 444.8 423.8 (14.5)

Other66.0 5.7 5.3 5.0 4.7 (21.7)

Total Accesses 46,433.6 46,826.3 47,020.9 47,195.7 47,349.7 2,0

1 PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company’s accesses for internal use included.2 ADSL, satellite, optical fibre, cable modem and broadband circuits.3 Leased lines.4 Wholesale Line Rental.5 Includes naked shared loops.6 Wholesale circuits.

Note: Iberbanda´s accesses are included from December 2006.

Telefónica EspañaConsolidated Income Statement


Revenues 20,838 20,683 0.7 5,132 5,222 (1.7)

Internal exp capitalized in fixed assets 213 220 (3.3) 61 59 4.2


Other net operating income (expense) 7 (71) c.s. (24) 8 c.s.Gain (loss) on sale of fixed assets 54 137 (61.0) (0) 145 c.s.Impairment of goodwill and other assets (8) (17) (51.7) (3) (3) (13.7)


OIBDA margin 49.4% 45.7% 3.7 p.p. 47.3% 39.5% 7.8 p.p.

Depreciation and amortization (2,239) (2,382) (6.0) (550) (587) (6.3)

Operating income (OI) 8,046 7,067 13.9 1,878 1,476 27.2

Notes:• OIBDA and OI before brand fees.• 2008 figures reflect the new applicable framework for public telephony services (net revenues). 2007 figures reported figures have not changed (gross revenues and gross expenses).

Therefore, 2008/2007 variations are not homogeneous.

Results by regional business units Telefónica España


Telefónica España: wireline businessSelected financial data

January - December October - DecemberUnaudited figures (thousands) 2008 2007 % Chg 2008 2007 % Chg

Revenues 12,581 12,401 1.4 3,113 3,183 (2.2)

OIBDA 6,050 5,249 15.3 1,421 1,181 20.3

OIBDA margin 48.1% 42.3% 5.8 p.p. 45.6% 37.1% 8.5 p.p.CapEx 1,498 1,614 (7.2) 455 553 (17.7)

OpCF (OIBDA-CapEx) 4,552 3,635 25.2 966 628 53.7

Notes:• OIBDA before brand fee.• 2008 figures reflect the new applicable framework for public telephony services (net revenues). 2007 figures reported figures have not changed (gross revenues and gross expenses).

Therefore, 2008/2007 variations are not homogeneous.

Telefónica España: Wireline business selected revenues data


Traditional Access12,944 2,772 6.2 681 688 (1.1)

Traditional Voice Services 4,436 4,792 (7.4) 1,078 1,203 (10.4)

Domestic Traffic22,566 2,921 (12.2) 619 729 (15.0)

Interconnection3960 952 0.8 230 237 (3.0)

Handsets sales and others4910 918 (0.9) 228 237 (3.6)

Internet Broadband Services 3,017 2,775 8.7 754 716 5.2

Narrowband 55 95 (42.8) 7 18 (60.5)

Broadband 2,962 2,679 10.5 747 698 6.9

Retail52,635 2,361 11.6 663 624 6.3

Wholesale6327 318 2.6 84 74 12.5

Data Services 1,190 1,160 2.6 313 309 1.5

IT Services 443 437 1.2 131 133 (1.8)

1 Monthly and connection fees (PSTN, Public Use Telephony, ISDN and Corporate Services) and Telephone booths surcharges.2 Local and domestic long distance (provincial, interprovincial and international) fixed to mobile traffic, Intelligent Network Services, Special Valued Services, Information Services (118xy),

bonusses and others.3 Includes revenues from fixed to fixed incoming traffic, mobile to fixed incoming traffic, and transit and carrier traffic.4 Managed Voice Services and other businesses revenues.5 Retail ADSL services and other Internet Services.6 Includes Megabase, Megavía, GigADSL and local loop unbundling.

Note: 2008 figures reflect the new applicable framework for public telephony services (net revenues). 2007 figures reported figures have not changed (gross revenues and gross expenses).Therefore, 2008/2007 variations are not homogeneous.


Telefónica España: wireless businessSelected financial data


Revenues 9,684 9,693 (0.1) 2,383 2,407 (1.0)

OIBDA 4,265 4,241 0.5 1,012 902 12.2

OIBDA margin 44.0% 43.8% 0.3 p.p. 42.5% 37.5% 5.0 p.p.CapEx 710 767 (7.4) 199 257 (22.8)

OpCF (OIBDA-CapEx) 3,555 3,474 2.3 813 645 26.2

Note: OIBDA before brand fee.

Telefónica España: wireless businessSelected revenues data


Service Revenues 8,457 8,509 (0.6) 2,055 2,111 (2.6)

Customer Revenues 6,943 6,861 1.2 1,713 1,718 (0.3)

Interconnection 1,243 1,372 (9.4) 286 333 (13.9)

Roaming - In 198 220 (9.9) 37 44 (16.1)

Other 73 57 28.5 19 17 15.7

Handset 1,227 1,184 3.6 328 296 10.9

Results by regional business unitsTelefónica España


Telefónica España: wireless businessSelected operating data

2007 2008

Unaudited figures Q4 Q1 Q2 Q3 Q4 % Chg y-o-y

MoU (minutes) 156 151 159 163 152 (2.3)

Pre-pay 64 63 69 84 66 2.8

Contract 218 209 216 213 205 (5.7)

ARPU (EUR) 31.8 30.5 30.8 30.9 29.5 (7.1)

Pre-pay 15.0 14.6 14.5 15.4 13.8 (8.3)

Contract 43.2 41.0 41.1 40.6 39.3 (9.0)

Data ARPU 5.0 5.1 5.0 5.3 5.5 8.3

%non-P2P SMS over data revenues 47.7% 52.7% 53.6% 54.8% 55.5% 7.8 p.p.

Note: MoU and ARPU calculated as monthly quarterly average.

Telefónica España: wireless businessSelected operating data

January - DecemberUnaudited figures 2008 2007 % Chg

MoU (minutes) 156 161 (2.8)

Pre-pay 70 74 (4.8)

Contract 211 223 (5.4)

ARPU (EUR) 30.4 32.3 (5.9)

Pre-pay 14.5 15.6 (6.6)

Contract 40.5 44.3 (8.5)

Data ARPU 5.2 4.8 9.3

%non-P2P SMS over data revenues 54.2% 47.8% 6.4 p.p.

Note: MoU and ARPU calculated as monthly January-December period average.


Telefónica Latinoamérica ended 2008 with a solid set of commercial and financialresults, underpinned by the strongdynamism of the telecommunicationsmarket in the region, which again postedstrong growth in the fourth quarter across the region.

In this context, Telefónica Latinoaméricacontinued to focus on maintaining itscommercial effort to capture growth in the mobile business and furthertransform its wireline business, withInternet, broadband and Pay TV services all increasing their weighting throughbundled and segmented offerings.

At the end of 2008 Telefónica Latinoaméricamanaged 158.3 million accesses in theregion, 24 million more than in 2007, a year-on-year increase of 18.0%.

After reporting 5.1 million net adds in thequarter and 18.9 million in the year to date1,Telefónica Latinoamérica had a total of 123.4 million mobile accesses (+22.7%compared with December 2007; +18.1% inorganic terms2), with solid growth across allits operations. This increase is due both tothe larger number of gross adds reported inthe year (+17.8%; +14.2% in organic terms)3,and the strong performance of churn, whichremained stable compared with 2007.

The largest increases in mobile accesseswere reported in: Brazil, where Telefónicastrengthened its position as market leaderwith almost 45 million mobile accesses(11.5 million more than in December 2007,with close to 4 million added following the acquisition of Telemig in April 2008);Mexico, where Telefónica continues to gainmarket share thanks to 22.3% year-on-yeargrowth in its customer base to 15.3 million;Peru, where customer numbers increasedby 31.6% year-on-year to over 10.6 millionmobile accesses; and Colombia, whereaccesses grew by 19.0% to almost 10million customers. The Company alsoperformed well in markets with highpenetration levels, such as Argentina, Chile and Venezuela where it continues to achieve significant year-on-yearincreases in its customer base (8.8% in Argentina, 9.4% in Chile and 12.2% in Venezuela, respectively).

In parallel with the sharp growth in mobileaccesses, Telefónica's strategy of increasingusage levels led to higher MoU, whichincreased by a notable 7.8% year-on-year inorganic terms3 (stable in the fourth quartercompared with the same period a yearearlier4). ARPU fell by 3.5% in 2008 inconstant euros in organic terms3 and by 3.1% in the quarter4, an improvement on the 4.7% decline in organic terms5 reportedin the previous quarter. ARPU was affectedby the reduction in termination rates inseveral countries and commercial initiativesaimed at boosting usage. Outgoing ARPU

grew by 0.9% year-on-year in constant euros in organic terms3 (+0.4% in the fourthquarter4), with close to 23 million moreaccesses than in December 2007.

In the wireline business, as a result of the transformation process for operations,the contribution of growth businesses(Broadband, Pay TV and Data) rose, boostedby the increase in bundled products and an improved portfolio of services, puttingthe wireline customer base at almost 34.9million accesses, up 3.9% year-on-year. By service:

• In Broadband net adds to December 2008topped one million accesses (more than191,000 net adds in the fourth quarter),to reach a customer base over 6 millionaccesses (+20.5% year-on-year). Of particular note are the expansion of the service in Colombia (+96.7%growth year-on-year), the sustainedgrowth achieved in Argentina (+32.1%year-on-year) and the consolidation ofgrowth in Brazil (+23.6% year-on-year) to over 2.5 million accesses.

Results by regional business unitsTelefónica Latinoamérica


1 The Telemig customers incorporated by the Group in April 2008 (close to 4 million) are not included as net adds in the period.2 Including Telemig's accesses in December 2007.3 Including Telemig in April-December 2007.4 Including Telemig in October-December 2007.5 Including Telemig in July-September 2007.

• In pay TV, Telefónica Latinoaméricaalready has over 1.5 million subscribers,with operations in Peru, Chile, Colombia,Brazil and Venezuela, up from 1.2 millionin December 2007.

• Fixed telephony accesses totalled 25.6 million at the end of December2008, 1.0% more than in December 2007. Particularly noteworthy was thefixed-wireless project in Peru, whichunderpinned the 5.0% year-on-yeargrowth in wireline telephony accesses in the country. Also, the growth of fixedwireless accesses in Venezuela remainedstrong (+31.8% year-on-year), with more than 1.3 million accesses at the end of the year.

Underlining the Company’s successfulpolicy of unlocking value in the customerbase, the average revenue per fixedtelephony access in 2008 advanced 6.4% in constant euros (+5.5% in the first ninemonths), driven by higher revenues from new businesses and services.

The Company continued to focus onbundled services, with 49% of broadbandaccesses under a 2P/3P offer (+18 percentagepoints versus 2007). Including local andcontrol usage bundles, 60% of fixedtelephony accesses are part of a bundle (up7 percentage points from December 2007).

The Company’s strong commercialperformance in 2008 is reflected in a strongset of financial results, despite the worseevolution of exchange rates, that drain 3.7percentage points to revenue growth and4.0 percentage points to OIBDA growth (vs. -3.0 percentage points to both metricsin the first nine months of 2008).

Revenues amounted to 22,174 million eurosin 2008, up 10.4% on 2007 in current euros.

Brazil remains the Company’s main growthdriver, accounting for 38.8% of revenues in 2008 in current currency, followed byVenezuela (12.5%), and Argentina (11.4%).

In organic terms6 revenues advanced 12.9%year-on-year, with the pace of growth in thefourth quarter similar to that in the firstnine months. By country, Brazil is the largestcontributor to organic revenue growth (+3.5 percentage points), followed byVenezuela (+2.8 percentage points),Argentina (+2.4 percentage points) and Mexico (+1.7 percentage points).

Revenue growth, together with ongoingefficiency improvements, underpinned18.6% growth in operating income beforedepreciation and amortisation (OIBDA)in current euros to 8,445 million euros (+21.5% in organic terms6). The pace ofgrowth picked up significantly in the fourth quarter (+15.6% organic growth7

to September), mainly due to the personnel reorganization provisions made in 2007 (most of which were made in the fourth quarter). Stripping out these provisions, OIBDA in 2008advanced 16.3% in organic terms6.

As a result, the Company’s margin advanced significantly, both year-on-yearand quarter-on-quarter. The OIBDA marginstood at 38.1% in 2008, up 2.6 percentagepoints on 2007, and 41.2% in the fourthquarter (37.0% to September). The increasein the OIBDA margin in the fourth quarter(+7.7 percentage points) reflects theefficiency improvements achieved in 2008 and the impact of the personnelreorganization provisions made in the last quarter of 2007.

Brazil was the biggest contributor,accounting for 39.8% of TelefónicaLatinoamérica’s OIBDA in current euros.Venezuela and Argentina also madenoteworthy respective contributions of 15.7% and 10.9%, while Mexico’scontribution doubled from 2.5% in 2007 to 5.0% in 2008.

In organic terms6, OIBDA advanced 21.5%year-on-year, driven by Venezuela (+5.0percentage points), Mexico (+3.9 percentagepoints) and Brazil (+3.2 percentage points).

Telefónica’s CapEx in Latin Americaamounted to 4,035 million euros in 2008(up 21.2% on 2007 in organic terms6), drivenby the commercial activity in the wirelinebusiness, both in broadband and in pay TV, while in the wireless business theexpansion of the coverage and capacity ofGSM networks and the rollout of UMTScontinued (including the acquisition oflicences in Brazil).

Telefónica Latinoamérica generatedoperating cash flow (OIBDA-CapEx) of 4,410million euros in 2008, up 16.7% on 2007 incurrent euros (+21.8% organic growth8).


6 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and Telemig in April-December 2007.7 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and Telemig in April-September 2007.8 Assuming constant exchange rates and including the consolidation of TVA in January-September 2007 and Telemig in April-December 2007.

Brazil

The Brazilian telecommunications marketrecorded one of the highest growth rates in 2008, with a sharp rise in mobile andbroadband accesses.

In this market, Telefónica reported 60.7million accesses at the end of 2008, 24.0% more than in 2007, thanks to sharpincreases in customer numbers at Vivo andthe success of the policies to transformTelesp based on bundled services. Vivoconsolidated its leading market positionand had a total of 44.9 million accesses(+34.2% year-on-year). Meanwhile, Telespcaptured a large part of broadband growth,increasing its accesses by 23.6% year-on-year to almost 2.6 million, and drove thegrowth of the pay TV market, where it nowhas over 472,000 accesses (+104.5%).

With regard to financial results, it isnoteworthy that in 2008 Telefónica reached in Brazil higher growth rates than in 2007 in local currency. Also, in the fourth quarter the growing trend in OIBDA and revenue continued.

Telefónica’s revenues in Brazil totalled 8,606 million euros in 2008, an advance of 12.2% year-on-year in local currency, after rising 15.8% in local currency in thefourth quarter compared with the sameperiod a year earlier. This growth wasfuelled by the strong performance of Vivoand the sustained growth acceleration inTelesp’s revenues over the year.

Operating income before depreciation andamortisation (OIBDA) reported by Telefónicain Brazil increased by 9.8% year-on-year in local currency to 3,359 million euros(+16.8% in the fourth quarter). This strongperformance reflects both efficiencyimprovements at Vivo and the growth inOIBDA at Telesp, despite the increasedweight of new businesses requiring greaterresources. Telefónica’s OIBDA margin inBrazil remained virtually unchanged at39.0% in 2008 (39.9% in 2007).

Telefónica is committed to Brazil as amarket with strong potential, which is a benchmark in the take-up of newtechnologies and which offers huge scope for increased service penetration.Accordingly, CapEx in Brazil totalled 1,614million euros in 2008 (+48.4% year-on-yearin local currency including the acquisition of Vivo’s 3G licences and +27.7% excludingthese licences).

Telefónica generated operating cash flow(OIBDA-CapEx) of 1,745 million euros inBrazil in 2008, down 11.5% in local currencyon 2007. However, excluding the impact of the acquisition of Vivo’s 3G licencesoperating cash flow remained at the same level as in 2007 despite the higherinvestment made.

VIVOMobile accesses in the Brazilian markettopped 150 million at the end of 2008,around 30 million more than in December2007. As a result, the penetration rateexceeded 78% (up 15 percentage points from December 2007), further establishingBrazil as one of the fastest growing mobile telephony markets in the world.

Vivo undertook outstanding commercialeffort in the fourth quarter, with 5.9 milliongross adds, a significant increase in organicterms9 on October-December of 2007. As aresult Vivo maintained its market share ataround 30% despite the more competitivemarket conditions, primarily in Sao Paolo.

Against this backdrop Vivo kept churnunder control, both in the full year and the fourth quarter. In 2008 churn stood at2.6% (+0.2 percentage points year-on-year in organic terms10), while it was slightly lower than the full-year average in the last quarter (2.5%, up 0.2 percentage points year-on-year in organic terms9).

As a result, Vivo posted net adds of 2.7million accesses in the fourth quarter of2008, 9.0% more than in the same period a year earlier in organic terms9. In the fullyear net adds totalled 7.5 million accesses11

(+54.6% from 2007 in organic terms10).

Vivo had almost 45 million accesses at the end of 2008, 34.2% larger than itscustomer base in 2007 (+20.2% in organicterms)12. Also worth highlighting is the GSM customer base evolution to over 30 million, representing 68% of the total(+34 percentage points year-on-year).

The Company’s effort to foster the contractcustomers segment should be highlighted.Net adds in this segment almost doubledvs. 2007 (+86.9% year-on-year in organicterms9). As a result contract customers nowrepresent 19.0% of the total. Thisperformance reflects the effectiveness of the Company’s policies to attract andretain high-value customers, with the ‘VivoEscolha’ plans proving especially successful.

In an environment marked by stronggrowth and intense competition, Vivo’s MoU was 86 minutes in 2008, up 12.0%from 2007 in organic terms10 and 85minutes in the fourth quarter, 6.9% higher than in the same period of 2007 in organic terms9. This positive performance was underpinned by the growth in outgoing MoU.



9 Including Telemig in October-December 2007.10 Including Telemig in April-December 2007.11 The Telemig customers incorporated by the Group in April 2008 (close to 4 million) are not included as net adds in the period12 Including Telemig in December 2007.

ARPU fell 5.8% year-on year in 2008 in localcurrency in organic terms13, affected byincreased competition and the increase in‘SIM only’ customers, and by 6.4% in thefourth quarter in organic terms14. However, it improved in quarter-on-quarter terms (-1.4% compared with the third quarter).

Meanwhile, Data revenues accounted for9.2% of service revenues in 2008, up 46.6%from 2007 (+38.3% in organic terms13). Theweighting of non-SMS and connectivitydata revenues also increased, thanks largelyto the success of card/modem offerings andservice plans (Vivo Zap, Vivo Wap, Vivo Play).

Revenues in 2008 totalled 2,932 millioneuros, up 22.3% year-on-year in localcurrency (+13.1% in organic terms13), afterjumping 26.8% year-on-year in localcurrency in the fourth quarter (+14.3%organic14). Underlying the strong revenueperformance was a 23.2% year-on-yearincrease in local currency in servicerevenues (+13.6% organic13), driven by a 24.6% jump in outgoing revenues (+15.6% organic13).

Despite an increase in commercialinitiatives, subscriber acquisition costs fell notably. As a result, operating incomebefore depreciation and amortisation(OIBDA) rose 34.5% year-on-year in localcurrency to 825 million euros (+22.4%organic13), significantly outstripping revenuegrowth. In the fourth quarter year-on-yearOIBDA growth was even higher, despite the increased commercial activity, at 35.9%in local currency (+24.4% organic14). Theseresults reflect the Company’s drive toimprove the efficiency of its commercial and management processes, underpinnedby the increased weighting of GSMcustomers and larger scale.

As a result, the 2008 OIBDA margin stood at28.2%, up 2.6 percentage points from 2007(+2.1 percentage points in organic terms13).Vivo achieved a fourth-quarter OIBDAmargin of 28.7%, 2.0 percentage pointshigher than in the same period a yearearlier, (+2.4 percentage points like-for-like14),despite the increased commercial activity.

CapEx in 2008 amounted to 739 millioneuros, largely affected by the acquisition of3G licences and the start-up of operations inthe North-East of Brazil. In organic terms13,CapEx increased by 24.8% in 2008 excludingthe 3G licences acquisition.

Operating cash flow (OIBDA–CapEx) in 2008was 87 million euros, which rises to 312million euros stripping out the cost of thelicences, a year-on-year increase of 22.2% inlocal currency (+18.8% in organic terms13).

TELESPIn 2008 Telesp focused on transforming its operations in order to fully leverage the potential of its business by offeringcustomers a wide and competitive range of products based on its service bundlingstrategy (2P/3P) in a market that remainshighly dynamic, bolstering its position as a pioneer in Latin America in the use of new technologies.

The broadband market grew by anestimated 25% year-on-year in 2008, driven largely by Telesp with net adds of more than 488,000 accesses in 2008 (up 5.8% from 2007).

Telesp had 15.8 million accesses at the endof 2008, having doubled its pay TV accesses to 472,200 and captured the growth of thebroadband market (+23.6% year-on-year to 2.6 million accesses). Fixed-line accessesregistered a slight year-on-year decline of 2.5%.

In 2008 Telesp further developed itsbroadband services portfolio and now offers speeds ranging from 1Mb to 30Mb. At its pay TV business the Company rolledout an outstanding content offering.

The solid commercial results attained drove substantial year-on-year growth in revenues, which totalled 6,085 millioneuros. Revenues increased 8.2% in localcurrency in 2008 vs. 2007 (+7.5% organic15)after posting 10.6% growth in the fourthquarter, maintaining the acceleration in revenue growth since the start of theyear. This improvement was underpinned by growth in fixed telephony revenues and, above all, Internet, Pay TV and content revenues.

Fixed-line revenues advanced 2.7% in 2008in local currency (+2.0% to September),continuing the positive trend since the start of the year. Important factors in thisimprovement were the growth in trafficlinked to the mobile business, and thesuccess of service bundling policies. A totalof 57% of Telesp’s lines had bundled servicesat the end of 2008 (up 9 percentage pointsyear-on-year). Meanwhile, Internet and Pay TV revenues grew 41.1% in local currency in 2008, accounting for 12.9% of the Company’s revenues (14.0% in the fourth quarter), 3.0 percentage pointsmore than in 2007. Data, IT and CapacityRental revenues also rose sharply (+23.4%year-on-year in local currency in 2008),capturing the increase in new businessesand the growth of the Wholesale Businesslinked with increased mobile traffic.


13 Including Telemig in April-December 2007.14 Including Telemig in October-December 2007.15 Including TVA in January-September 2007.

Full-year operating expenses rose 7.7% from 2007 in local currency, lower than theincrease to September (+8.9%). The fall inthe pace of increase of costs is partly due to the personnel reorganization provisionsbooked in the fourth quarter of 2007;stripping out these provisions, operatingexpense growth increases to 9.4% year-on-year in local currency in 2008. This is mainly due to the higherinterconnection/transport expenses linked to the rise in traffic and the increased weighting of new businesses,which require greater investment. Alsonoteworthy are the growth in customerservice and network maintenance costs due to the increase in broadband and payTV accesses and the impact of policiesimplemented by Telesp to maximisecustomer satisfaction. On the other hand,personnel expenses were lower followingthe implementation of the personnelreorganization plan provisioned in 2007, andthe bad debt ratio decreased to 3.1% overrevenues, improving vs. previous quartersand vs. the previous year (3.6% in 2007).

Operating income before depreciation andamortisation (OIBDA) advanced 2.8% year-on-year in local currency to 2,515 millioneuros on the back of the strong revenueperformance and efficiency improvementmeasures. As a result, the 2008 OIBDAmargin stood at 41.3%, 2.1 percentage pointslower than in 2007 but higher than themargin to September (40.6%).

CapEx in 2008 totalled 875 million euros (up +20.0% year-on-year in local currency),while operating cash flow (OIBDA-CapEx)amounted to 1,639 million euros (down4.5% year-on-year in local currency).

Argentina

Argentina’s telecommunications marketposted significant growth in 2008 in boththe wireless and broadband businesses.

In this scenario, Telefónica’s accesses inArgentina rose by nearly 1.3 million fromDecember 2007 (up 6.4% year-on-year), to a total of 20.7 million accesses at the end of 2008. This sharp growth wasexplained by the performance of thewireless business, which registered year-on-year growth of 8.8%, and by the broadband business, where the number of accesses passed the one-millionmark, growing 32.1% in 2008.

In addition, the Company continued itspolicy of unlocking value in the customerbase, with a focus on bundling services atthe fixed telephony business (46.8% of lineswith bundles; up 11.8 percentage pointsfrom December 2007) and on encouragingusage in the wireless business bypromoting on-net traffic.

Revenues in 2008 totalled 2,527 millioneuros, an increase of 21.3% year-on-year in local currency, climbing 20.7% in thefourth quarter of 2008.

The performance of revenues and costcontainment measures in a high-inflationenvironment were reflected in theoperating income before depreciation andamortisation (OIBDA), which rose 26.7%year-on-year in 2008 in local currency to 919 million euros, after the pace of growthincreased in the fourth quarter (up 65.7% vs.the fourth quarter of 2007), pushed up bythe reorganization costs registered in 2007.The 2008 OIBDA margin stood at 35.2%, 1.8percentage points higher than a year earlier.

CapEx in 2008 totalled 344 million euros (up 29.7% year-on-year in local currency),while operating cash flow (OIBDA-CapEx)amounted to 574 million euros (up 25.0%year-on-year in local currency).

T. Móviles ArgentinaThe Argentine wireless market continued to post strong dynamism in 2008, with theestimated penetration rate exceeding 110%at the end of December 2008, 12 percentagepoints higher than in December 2007.

In this environment the operator’s customerbase totalled 14.8 million accesses, 8.8%more than in the same period a year earlier.The Company reported 1.2 million net addsin 2008, and churn stood at 1.9%. In thefourth quarter of 2008, net adds of 176,926customers were registered, with a churnrate of 1.8%, in line with the same quarter a year earlier.

The Company continued to strengthen the value of its customer base, with a very positive performance in usage ratios. MoU in 2008 rose 21.1% year-on-year to 76minutes. In the fourth quarter, MoU stoodat 83 minutes (up 23.9% year-on-year),driven by sharp growth in on-net traffic.

The push in usage was similarly reflected in ARPU, which is consolidating its positionas the key driver of revenue growth. ARPU in 2008 climbed 10.5% year-on-year in local currency, while in the fourth quarter,ARPU rose a noteworthy 14.3% in localcurrency. ARPU growth was fuelled by thepositive performance of data revenues,which jumped 30.5% year-on-year in local currency and already account for 25.4% of service revenues.

Revenues in 2008 increased 27.3% year-on-year in local currency to 1,585million euros, with even stronger growth inthe fourth quarter (up 26.6% year-on-year).This strong performance was underpinnedby outgoing revenues, which rose 32.2%year-on-year in local currency in 2008,driving service revenues up 28.2% in 2008 in local currency.

The Company has furthered improved itsefficiency ratios, with growth in operatingcosts in 2008 (up 21.6% year-on-year in local currency) trailing revenue growth in spite of rising inflation. The increase in interconnection and structure costs was more than offset by significantefficiency improvements, reducing sharply other expenses.



As a result, operating income beforedepreciation and amortisation (OIBDA)in 2008 rose 33.4% year-on-year in localcurrency to 514 million euros, while in thefourth quarter it climbed a noteworthy40.1% year-on-year in local currency. The 2008 OIBDA margin stood at 32.4% (up 1.5 percentage points from 2007),underpinned by the good performance in the fourth quarter, when the marginstood at 39.5% (up 2.9 percentage pointsfrom the fourth quarter of 2007).

CapEx in 2008 amounted to 154 millioneuros (up 35.4% year-on-year), whileoperating cash flow (OIBDA-CapEx) rose32.6% year-on-year in local currency to 360 million euros.

Telefónica de ArgentinaThe Argentine fixed linetelecommunications market continued to grow rapidly in 2008, fuelled by the increased penetration of broadband services.

Telefónica de Argentina had 5.9 millionaccesses at the end of 2008, 1.0% more thanin 2007. Wireline accesses remained stablewhile growth in broadband accesses rosesharply to 1.1 million accesses (up 32.1% vs.December 2007), with net adds in 2008 of 262,667 accesses (35,762 net adds in the fourth quarter of 2008).

This good performance was thanks to theCompany's strategy of bundling services,with an increasingly attractive Duo bundleoffering and the ongoing commitment to improving speed and service. Of newbroadband connections in 2008, 79% were Duo bundles, and Duos increased their weight over total ADSL connections to 58% (up 24 percentage points fromDecember 2007).

Revenues in 2008 increased 13.5% year-on-year in local currency to 1,027million euros, with significant growth in the fourth quarter (up +12.5% year-on-yearin local currency). This performance wasdriven by sharp growth in Internet andcontent revenues and a simultaneous stableevolution in the wireline business. Internetand content revenues increased 42.5% inlocal currency in 2008 from a year earlier(up 57.8% year-on-year in the fourth

quarter), accounting for 17.3% of totalrevenues (up 3.5 percentage points from2007). Meanwhile, revenues from thetraditional telephony business rose 4.1% in 2008, boosted by the good performancein basic telephony revenues (up 6.3% vs.2007) despite lower public use telephonyrevenues, which by the end of 2008accounted for only 5.6% of revenues (2.4 percentage points less than in 2007).Average revenue per fixed line access thusincreased 13.6% from 2007 in local currency.

Operating expenses in 2008 rose 10.4%year-on-year in local currency. It must benoted that in 2007 and mainly in the fourthquarter, the Company recorded provisionsrelated to personnel reorganization.Excluding the impact of those provisions,expenses in 2008 would have increased by 29.3% from a year earlier. This evolutionwas due primarily to rising prices, and bythe higher weight of the new businesses,reflected mainly in an increase insubcontract and personnel expenses.

Bad debt provisions totalled about 1.1% of revenues in 2008, 0.2 percentage points higher than in 2007.

As a result, Telefónica de Argentina’soperating income before depreciation and amortisation (OIBDA) showed a sound performance in 2008, rising 19.0%year-on-year in local currency to 405 millioneuros. The OIBDA margin improved by 2.3 percentage points in 2008 year-on-yearto 34.4%.

CapEx totalled 191 million euros (an increase of 25.4% in local currency).

Operating cash flow (OIBDA-CapEx) in 2008 stood at 214 million euros in 2008 (up 13.8% year-on-year in local currency).

Chile

In one of the Latin American markets with the highest mobile and broadbandpenetration rates, the Company focused onimproving usage ratios, on attracting highervalue mobile customers and on furthertransforming its fixed-line activities.

In this context, Telefónica managed over 10million accesses at the end of 2008, up 6.8%from December 2007 and consolidating its position as market leader in terms of fixed-line accesses, broadband andwireless customers.

Telefónica’s revenues in Chile totalled 1,936million euros in 2008, an advance of 13.3%year-on-year in local currency, after rising10.2% in the fourth quarter in local currencycompared with the same period a yearearlier. The sharp rise in revenues wasmainly due to higher mobile revenues, with positive growth also reported at the wireline business.

Operating income before depreciation andamortisation (OIBDA) increased by 9.7%year-on-year in local currency to 740 millioneuros, with the pace of growth acceleratingin the fourth quarter (+13.2% year-on-year)mainly as a result of the growth in thewireless business OIBDA. The 2008 OIBDA margin stood at 38.2%, down 1.3% from 2007 due to lower wirelinemargins stemming from the change in the revenue mix.

CapEx in 2008 amounted to 423 millioneuros (+7.5% year-on-year in local currency),while operating cash flow (OIBDA-CapEx)stood at 316 million euros, up 12.6% from2007 in local currency.


T. Móviles ChileAt the end of 2008 the estimatedpenetration rate of the Chilean mobilemarket stood at 97%, up 7 percentagepoints from December 2007.

Against this backdrop, Movistar Chileconsolidated its leading market position,reaching a customer base of almost 6.9million accesses, with net adds of morethan 592,000 accesses in 2008 (more than172,000 in the fourth quarter). As a result,the customer base grew by 9.4% year-on-year, with the weighting of the contractsegment increasing to 27.9% of the total(+3.4 percentage points vs. 2007). Thismeans the contract segment grew 24.6% in 2008, with net adds of 378,500 (72,700 in the fourth quarter), almost 64% of total net adds in the year.

The Company’s policy of unlocking value inthe customer base, which is reflected in theimproved mix, has a positive impact both onchurn and usage ratios.

Churn remained at around 1.8% in the full year and the fourth quarter, slightlylower than in the fourth quarter of 2007and 0.1 percentage points lower than inJanuary-December 2007.

With regard to usage ratios, MoU in 2008was 123 minutes, up 16.3% year-on-year(+7.5% year-on-year in the fourth quarter).This growth is reflected in 2008 ARPU,which rose 8.3% year-on-year in localcurrency (+3.7% year-on-year in the fourth quarter).

The Company’s strong operatingperformance drove a 20.0% year-on-yearrevenue increase in local currency to 1,051 million euros in 2008 (+13.3% in thefourth quarter). The improvement in usageratios is reflected in service revenues, whichadvanced 20.3% year-on-year in localcurrency (+14.9% in the fourth quarter),underpinned by outgoing revenue growth(+18.2% year-on-year in local currency in2008 and +6.8% in the fourth quarter).Meanwhile, data revenues grew 37.8% year-on-year in local currency in 2008 andnow account for 8.9% of service revenues.

Operating income before depreciation and amortisation (OIBDA) jumped 22.4%year-on-year in local currency to 402 millioneuros (+19.0% in local currency in the fourthquarter). This growth in OIBDA allowed toreach a margin of 38.2%, 0.7 percentagepoints higher year-on-year, despite thehighly competitive environment in whichthe Company operates.

CapEx in 2008 totalled 228 million euros, up 10.1% in local currency from 2007, while operating cash flow (OIBDA-CapEx)amounted to 173 million euros, up 43.5% in local currency from 2007, thanks to the increase in OIBDA.

Telefónica ChileTelefónica Chile managed a total of3.1 million accesses at the end of 2008, 1.4% more than in December 2007,underpinned by growth in broadband andpay TV customers, which offset the fall infixed-line accesses (-2.4% year-on-year).

The Company achieved 16,391 net adds in the broadband market in the fourthquarter, bringing the full-year total to70,565. Telefónica Chile managed 716,562broadband accesses in December 2008, up10.9% from 2007. Regarding Pay TV, accessestotalled 262,957, an increase of 19.6%.

This strong performance was largely due tothe Company’s service bundling strategy,which is creating a quality offering for thecustomer. A total of 95% of broadbandaccesses have a bundled product (2P/3P). This strategy, together with the drive toimprove broadband service speeds, furtherconsolidated Telefónica’s leadership of theChilean market. It is worth noting thatTelefónica tripled the speed of its offering inthe first quarter of the year and in the fourthquarter doubled the speed again. As a result,at the end of 2008 customers enjoyed, onaverage, a speed six times greater than a yearearlier. The Company also launched a prepaybroadband offering which has attracted14,000 customers since its launch.

At the same time, the commitment tobundling services (63% of fixed lines inDecember 2008 compared with 52% inDecember 2007) had pushed the averagerevenue per fixed telephony access (+5.7% in local currency vs. 2007).

As a result, 2008 revenues climbed 6.1%year-on-year in local currency to 974 million euros (+5.5% in the fourth quarter).Particularly noteworthy was the growth in Internet and Pay TV revenues, whichaccounted for 21.9% of the revenues ofTelefónica Chile after advancing 25.9% year-on-year in local currency. Fixed-linerevenues remained virtually unchanged in2008 (-0.5% year-on-year in local currency)due to the strong performance of trafficrevenues. Also, growth in Data, IT andCapacity Rental revenues accelerated to25.1% in local currency in the year (+21.1% in the first nine months of 2008).

Operating expenses rose 13.7% year-on-yearin local currency, decelerating slightlycompared with the first nine months(+14.1%), mainly due to the behaviour of exchange rates and the better CPIevolution. Bad debt provisions stood at 4.9% of revenues in 2008 and at 4.6% in the fourth quarter.

Operating income before depreciation andamortisation (OIBDA) for 2008, 339 millioneuros, fell 2.1% year-on-year in local currency,with growth of 8.3% in local currencyreported in the fourth quarter, a significantimprovement on previous quarters thanks to earnings from asset disposals. The 2008 OIBDA margin stood at 34.8%, 2.9 percentage points less than in 2007, due to the increased weighting of newbusinesses, with a lower margin. However, it represents an improvement compared to the margin of 33.9% recorded in the first nine months of 2008.

CapEx in 2008 totalled 195 million euros, an increase of 4.7% in local currency from 2007, while operating cash flow(OIBDA-CapEx) stood at 144 million euros,down 10.1% in local currency on 2007.



Peru

At the end of 2008 Telefónica managed atotal of 15.0 million accesses in Peru, up23.1% year-on-year. This robust growth wasunderpinned by the sharp rise in wirelesscustomers, which increased by 2.5 million in 2008 to 10.6 million at the end of theyear (+31.6% from 2007).

Also noteworthy were the 5.0% year-on-year rise in wireline accesses, thegrowth in broadband to almost 700,000accesses (+22.1% year-on-year) and theincrease in Pay TV accesses to 654,537 at the end of 2008.

The strong growth in commercial activitythroughout the year translated into a 7.6%year-on-year rise in revenues to 1,627 millioneuros in local currency, driven by higherwireless, broadband and TV revenues.Additionally, it is worth to note theacceleration of revenue growth in thefourth quarter, after having increased by11.8% year-on-year in local currency.

Operating income before depreciation andamortisation (OIBDA) in 2008 grew 29.0%year-on-year in local currency to 621 millioneuros, driven by the jump in the fourthquarter (+213.1% year-on-year in localcurrency). The 2008 OIBDA margin stood at38.2%, up 6.3 percentage points from 2007.

CapEx through to December amounted to289 million euros (+2.8% year-on-year inlocal currency), leaving operating cash flow (OIBDA-CapEx) of 332 million euros, a significant year-on-year jump of 65.5% in local currency.

T. Móviles PerúThe estimated penetration rate in thePeruvian wireless market continued toadvance at an impressive pace in 2008 (+13percentage points from 2007), reaching 61%in December, with a growth of more than 3percentage points in the fourth quarter.

Telefónica’s total wireless accesses in Perugrew 31.6% year-on-year in 2008 to morethan 10.6 million, underpinned by the sharp increase in prepay customers (+32.3%year-on-year) and steady growth in thecontract customer base. As a result, partlyunderpinned by the migrations from theprepay segment, contract customers nowtop one million, up 25.1% from 2007.

Gross adds amounted to more than 6.0 million in 2008 (+15.1% year-on-year),with almost 1.5 million reported in thefourth quarter. Churn in 2008 was 3.1% (0.2 percentage points more than a yearearlier) and 2.9% in the fourth quarter(improving 0.3 percentage points year-on-year). With 602,592 new customers added inthe fourth quarter, net adds in 2008 toppedthe 2.5 million mark, with a sharp rise incontract customers (+68.1% year-on-year).GSM customers accounted for 89.6% of thetotal at year-end 2008 (+12.2 percentagepoints versus December 2007).

MoU in 2008 remained stable at 90minutes, and stood at 89 minutes in thefourth quarter (-5.9% year-on-year), due to adecline in prepay MoU following the launchof a single tariff in April and the reduction in the promotional minutes offered to newcustomers compared with 2007. Negativelyaffected by the reduction in mobiletermination rates (-19% in nominal termssince 1 January 2008), the increase in trafficpromotions versus 2007 and the sharpgrowth in the customer base, in 2008 ARPUfell by 16.6% year-on-year in local currency,though the decline decelerated in the fourthquarter (-9.1% year-on-year in local currency).

Revenues in 2008 advanced 28.4% year-on-year in local currency to 773 million euros(+25.5% in the fourth quarter), driven by therobust growth in wireless service revenues(+20.1% year-on-year in local currency).Outgoing wireless revenues jumped 25.5%to December in local currency showing asolid advance in 2008. Incoming revenuesgrew 8.9% year-on-year in 2008, despite thereduction in mobile termination rates fromJanuary, after growing 39.6% in the fourthquarter thanks to higher traffic volumes.

Also noteworthy was the increase in datarevenues (+66.3% year-on-year in localcurrency), which now account for 13.3% ofwireless service revenues (+3.6 percentagepoints versus December 2007).

The sharp growth in revenues together withthe drive to contain costs, with commercialexpenses cut despite strong activity in the period, resulted in full year operatingincome before depreciation andamortisation (OIBDA) of 266 million euros,up 64.6% year-on-year in local currency(+58.9% in the fourth quarter).This left the OIBDA margin for the quarter at 39.1% (7.9 percentage points higher year-on-year),with the margin for the year increasing by7.6 percentage points from 2007 to 34.4%.

CapEx in 2008 amounted to 144 millioneuros (down 6.8% in local currency fromDecember 2007), allowing operating cashflow (OIBDA-CapEx) to reach 122 millioneuros (compared with 7 million euros inDecember 2007).


Telefónica del Perú16

Telefónica del Perú managed 4.4 millionaccesses at the end of December 2008, up 6.4% year-on-year, with a notable 5.0%year-on-year increase in wireline telephonyaccesses, mainly driven by the growth infixed-wireless accesses to 485,529 and inbroadband accesses (+22.1% year-on-year).

The sharp growth of the broadbandbusiness in the year is reflected incumulative net adds, which totalled 126,330 accesses (+21.9% versus 2007)leading the broadband customer base to almost 700,000 accesses.

Along with the expansion of broadband, the Company has been implementing abundling service and segmented offeringpolicy which is key to the transformation of its business. As a result there was a sharp increase in Dúo and Trío customersover the year, which accounted for 44.3% ofthe broadband customer base at the end of 2008 (compared with 0.6% in December2007 and 30.6% in September 2008). The growth pace of Dúo and Trío net addsaccelerated in the fourth quarter, partly due to the improved basic TV offering andthe start of the digitalisation process forpremium customers in Lima. These will see the number of channels increase from87 at present to 107.

In this context, and having grown in thequarter 2.1% year-on-year in local currencythanks to improved public telephony anddata revenues, revenues in 2008 stood at977 million euros (down 5.1% year-on-year in local currency). This decrease is mainlydue to the decline in traditional telephonyrevenues, primarily affected by the boom inwireless penetration in the country and thedecline in outgoing wireline traffic.

However, the success of new businessespartly offset this trend, being notable the year-on-year growth in broadbandrevenues (up 21.0% in local currency).Revenues from Internet, TV and content rose by 14.2% year-on-year in local currency,accounting for 30.5% of total revenues atthe end of December (up 5.2 percentagepoints versus 2007).

Operating expenses declined 12.2% year-on-year in local currency, having fallen34.4% year-on-year in the fourth quarter,partly due to provision related to thepersonnel reorganization made in thefourth quarter of 2007. Excluding thisimpact of this provision, operating expenseswould have advanced 3.3% in local currencyin 2008. This reflects the increase incommercial and supplies costs as a result ofthe sharp increase in commercial activity.Bad debt provisions represented 3.2% ofrevenues at the end of December.

As a result, operating income beforedepreciation and amortisation (OIBDA)rose 10.6% in local currency in 2008 to 354 million euros, leaving an OIBDA marginof 36.2% (up 5.2 percentage points fromJanuary- December 2007).The fourthquarter OIBDA margin was 37.1%.

CapEx in 2008 amounted to 144 millioneuros (up 14.7% year-on-year in localcurrency) while operating cash flow (OIBDA-CapEx) totalled 209 million euros(up 7.9% year-on-year in local currency).

Colombia

Telefónica managed a total of 12.8 millionaccesses in Colombia at the end of 2008, up 16.7% from 2007. This increase wasunderpinned by 19.0% year-on-year growth in wireless accesses to top 9.9million, and the broadband accessesexpansion to 393,871, more than doubling those at the end of 2007.

Revenues in 2008 totalled 1,490 millioneuros, a year-on-year decline of 3.9% in localcurrency. This performance is explained byboth lower wireless and wireline revenues,affected by the sharp reduction ininterconnection rates in December 2007. In the fourth quarter revenues fell 13.8%year-on-year in local currency mainly due tothe performance of the wireline business.

Operating income before depreciation andamortisation (OIBDA) in 2008 rose 3.6%year-on-year in local currency to 515 millioneuros. This reflects the successful efficiencyimprovement measures implemented by the Company and the reduction ininterconnection expenses. However, OIBDAdropped 13.2% year-on-year in local currencyin the fourth quarter mainly due to thedecline at the wireless business. As a result, despite the lower revenues, theOIBDA margin stood at 34.6% at the end of 2008, an improvement of 2.5percentage points from 2007.

CapEx in 2008 totalled 420 million euros(+17.9% year-on-year in local currency), whileoperating cash flow (OIBDA-CapEx) declined32.5% year-on-year in local currency termsto 95 million euros.



16 Wireline telephony accesses include all Telefónica´s fixed wireless accesses in Peru; those managed by the wireline business and those managed by the wireless business. However,earnings from fixed wireless accesses are included in the results of the Peruvian wireless business.

T. Móviles ColombiaThe pace of growth of the Colombianwireless market remained strong in 2008,with an estimated penetration rate at 91%,around 16 percentage points higher than in December 2007.

The Company managed almost 10 millionaccesses at the end of 2008, 19.0% morethan in 2007, with a 25.9% year-on-year rise in the prepay segment. GSM customersnow account for 91.6% of the total (+10.1 percentage points year-on-year).

There were 1.3 million gross adds in thefourth quarter, bringing total gross adds in the full year to 5.5 million, up 36.0% from 2007, mainly due to the Company’sdrive to expand the reach of its distributionnetwork in 2008.

Churn stood at 3.5% at the end of 2008,down 0.2 percentage points from 2007,whilst the churn rate in the fourth quarterstood at 3.7% (1.2 percentage points higher than in the fourth quarter of 2007).Accordingly, net adds in the quarter were261,145 accesses, bringing net adds in the full year to 1.6 million, 2.6 times more than in 2007.

With regard to usage, MoU performanceremained positive in 2008 to reach 124minutes, up 11.8% versus 2007, though it fellby 3.4% year-on-year in the fourth quarterdue to the greater weighting of the prepaysegment in the customer base (+4.6percentage points from December 2007).

The decline in ARPU in 2008 (down 21.6% inlocal currency) was mainly due to the sharpreduction (around 50%) in termination rates in December 2007. ARPU was also affected by the increased weighting of the prepay segment.

The Company is implementing measures to enhance the quality of its customer baseand to bolster its competitive positioning.These include promotions that rewardcustomer loyalty and new plans offering asingle tariff to any destination with lowerbasic charges, easing the customer accessto these plans.

Revenues in 2008 amounted to 815 millioneuros, down 5.1% year-on-year in localcurrency, while service revenues declined 5.5%, also in local currency. This performance was shaped by theaforementioned reduction in terminationrates, which resulted in a 42.8% year-on-yeardrop in 2008 in incoming revenues in localcurrency that was not offset by higheroutgoing revenues (+10.3% year-on-year inlocal currency). Revenues declined by 12.6%year-on-year in local currency in the fourthquarter, mainly due to the 36.3% fall inincoming revenues and the small rise inoutgoing revenues (+0.3% year-on-year in local currency).

Also worth highlighting is the increase indata revenues (+32.6% year-on-year in localcurrency), which accounted for 5.8% ofservice revenues in 2008 (+1.7 percentagepoints January-December 2007).

Despite the drop in revenues, operatingincome before depreciation andamortisation (OIBDA) registered solid 13.4%year-on-year growth in local currency to 208million euros thanks to lower supplies costs, cost contention measures and, to a far lesser extent, the provision related to personnel reorganization made in thefourth quarter of 2007 (stripping out this provision growth would be 11.8%). As a result, the OIBDA margin in 2008 stood at 25.6%, 4.2 percentage points higher than in 2007.

CapEx in 2008 stood at 230 million euros(+29.3% year-on-year in local currency) and operating cash flow (OIBDA–Capex)amounted to –22 million euros (versus 6 million euros in 2007).

Telefónica TelecomTelefónica Telecom managed over 2.8 millionaccesses in December 2008, up 9.2% from2007, driven by the increase in broadband(+96.7% year-on-year) and Pay TV (+95.1%year-on-year) accesses.

Thanks to its bundling strategy theCompany was able to capture growth in the broadband segment and stimulate theColombian Pay TV market. Having added38,803 new broadband customers in thefourth quarter, net adds in 2008 totalled193,600, a significant increase of 46.4%. As aresult total broadband accesses amountedto 393,871, with almost 83% of thesecustomers benefiting from a bundledpackage. Net adds in Pay TV totalled 69,388 in 2008, with 4,810 registered in the fourth quarter. As a result thecustomer base tripled from December 2007 to 142,318 accesses.

Revenues in 2008 decreased 2.9% year-on-year in local currency to 710 million eurosdespite the positive evolution recorded bythe Internet, TV and content revenues thatgrew 74.7% in local currency in 2008 andnow account for 15.8% of total revenues(+7.0 percentage points from 2007). Lowertraditional telephony revenues (-11.4% year-on-year in local currency) were largelyaffected by the fixed-wireless substitutioneffect and the reduction in call terminationcharges on fixed networks (-38% average),prompting a sharp fall in interconnectionrevenues (-19.2% in local currency). Revenuesdecreased 13.9% year-on-year in localcurrency in the fourth quarter, largely due to the recording of turnkey IT projects in the fourth quarter of 2007. Stripping out this impact, the revenue trend in the fourth quarter would be similar to that for the rest of the year.

Also, the growing weighting of bundledproducts over fixed access base pushed upthe average revenue per fixed telephonyaccess in 2008 by 4.0% year-on-year in local currency.


Operating expenses remained virtuallyunchanged in 2008 (-0.3% in local currencyversus 2007) thanks to the successfulefficiency policies implemented by theCompany over the year. Operating expensesfell 19.4% year-on-year in local currency inthe fourth quarter, affected by higher salesof equipment and the provision related tothe personnel reorganization made in thesame period of the previous year. Thus,stripping out this provision, the operatingexpenses growth in 2008 would be 0.5 % in local currency.

The bad debt provision represented 1.6% of revenues at the end of December, down1.3 percentage points from 2007.

As a result, operating income beforedepreciation and amortisation (OIBDA)totalled 307 million euros in 2008, down2.1% year-on-year in local currency (-6.4% in the fourth quarter). The 2008 OIBDAmargin stood at 43.2%, 0.3 percentage points higher than the 2007 figure.

CapEx in 2008 totalled 190 million euros(+6.5% year-on-year in local currency), whileoperating cash flow (OIBDA-CapEx) dropped13.4% year-on-year in local currency to reach117 million euros.

Mexico

The wireless market in Mexico grew at a fast pace in 2008, with an estimatedpenetration of 72% at the end of the year (up 8 percentage points fromDecember 2007).

Telefónica’s business in Mexico in the fourth quarter of 2008 was boosted by the Christmas Campaign, in which theCompany launched innovative productsgeared towards bolstering its competitivecommercial offer while focusing on growth and profitability. In addition, thedevelopment of its distribution network and ongoing improvements to the quality of its mobile network enabled the Company to maintain robust growth in commercial activity.

Telefónica Móviles Mexico’s wirelesscustomer base stood at 15.3 million lines at the end of December 2008, an increase of 22.3% from a year earlier. The Companyhad 15.5 million total customers in Mexicoin 2008 (up 23.3% year-on-year) and anestimated market share of 19.5% (up 1.2percentage points year-on-year), makingMexico Telefónica’s second most importantmarket in Latin America by number ofwireless customers.

A highlight of commercial initiatives that allowed the Company to improve itscompetitive position was the introductionduring the Christmas Campaign of a newprepay commercial offering known as‘Movistar 1-2-3,’ which complemented the‘per call’ rate. This scheme established anew, per-minute progressive rate based onthree levels depending upon the customer'susage. The Movistar 1-2-3 launch allowedthe Company to record more than 1.8million gross adds in the fourth quarter of 2008, and 6.8 million in full-year 2008 (vs. 7.3 million in 2007).

A notable improvement in activities gearedtoward increasing customer loyalty alongwith marketing initiatives to encourage top-ups meant that churn continued toperform favourably, with fourth-quarterchurn at 2.7% and 2008 churn at 2.4%(down 0.3 percentage points from 2007).

As a result of the high number of grossadds and the improvement in churn, net adds in the fourth quarter totalled668,585 bringing 2008 net adds to nearly 2.8 million customers.

MoU in 2008 reached 136 minutes (down 6.3% vs. 2007), while ARPU stood at 8.2 euros (down 4.3% in local currency).MoU in the fourth quarter of 2008 was 127 minutes, down 22.1% from the sameperiod a year earlier and at a similar level of third quarter 2008, due to changes in theexisting commercial offer and the launch of new pricing schemes aimed at buildingan innovative range of services with an improvement in their profitability.Meanwhile, ARPU in the fourth quarterdropped 6.7% year-on-year in local currency as a result of both a reduction in termination rates implemented in early 2008 and the lower usage.

Revenues in 2008 climbed 23.8% year-on-year in local currency to 1,631million euros, driven by a positiveperformance in service revenues, whichjumped 32.1% in 2008 and 24.5% in thefourth quarter (in line with the pace ofthird-quarter growth). A highlight was the significant growth the Companyregistered in outgoing revenues (up 38.2% year-on-year in local currency),underpinned by a sustained increase in traffic, especially outgoing traffic (up 29.2% in 2008), which outpaced the growth of the customer base.

Incoming revenues advanced 8.2% year-on-year in the fourth quarter of 2008 and by 12.1% in 2008, despite the 9.7% reduction in termination rates inJanuary 2008. Revenues rose 10.9% in thefourth quarter, reflecting the impact ofslower revenue growth from handset sales.

Operating income before depreciation and amortisation (OIBDA) in 2008amounted to 420 million euros, 2.5 times higher in local currency than the 179 million euros earned in 2007. The OIBDA margin for 2008 stood at 25.7%, a year-on-year increase of 13.2percentage points, reflecting significantefficiency improvements from economies of scale and cost containment efforts.

OIBDA in the fourth quarter of 2008 more than doubled from the same period a year earlier in local currency, with margins improving by 16.5 percentagepoints year-on-year to 32.2%.

CapEx in 2008 amounted to 317 million euros (up 49.7% year-on-year in local currency).

Finally, the Company posted positiveoperating cash flow (OIBDA-CapEx) of 103 million euros, a significant improvementon 2007's operating cash flow of -51 million euros, in spite of sharp growth in the customer base and stepped-upinvestment in 2008.



Venezuela

The Venezuelan wireless market had anestimated penetration rate of 100% in 2008,an increase of 14 percentage points from2007, making it one of the markets with thehighest penetration rates in the region.

In this environment, Telefónica’s business in the fourth quarter continued the trendfor growth and profitability seen in the first nine months of the year.

In the fourth quarter the Company focused on developing its service portfolio,highlights of which include the launch of pay TV service at a nationwide level via DTH satellite technology in October and the launch of 3G mobile broadbandservice in December, starting in the GranCaracas area.

The Company continued its strategy of offering a broader range of handsetsthan its competitors, being the exclusiveretailer of a number of handsets during the Christmas Campaign, and boostingfixed-wireless sales. Wireless gross adds in the fourth quarter exceeded 1.2 million,bringing 2008 wireless gross adds to nearly 4.3 million.

Churn in 2008 stood at 2.7%, in line with2007, despite increasing 0.3 percentagepoints in the fourth quarter. Worth noting is the Company’s ability to contain churn in a year marked by competitors' intensivemarketing campaigns and by customermigration to GSM technology.

Telefónica Móviles Venezuela’s customerbase in 2008 stood at 11.9 million totalaccesses (up 14.1% vs. December 2007),fuelled by the wireless customer base (up12.2%) to 10.6 million and a sharp growth in fixed wireless (up 31.8%) with 1.5 milliontotal net adds recorded in 2008. Net adds in the fourth quarter totalled 343,334accesses, of which 303,816 were newwireless customers.

Of total wireless gross adds in 2008,approximately 66% were based on GSMtechnology, and GSM users accounted for55% of total wireless lines, an increase of 20 percentage points from a year earlier.

MoU in 2008 dropped 2.2% from 2007 to 129 minutes (down 4.2% in the fourthquarter), affected by a sharp increase in thecustomer base. ARPU in 2008 rose 11.0%year-on-year in local currency, followingrobust growth in the fourth quarter (up15.9% in local currency) which stemmedfrom the growing contribution of dataservices. These accounted for 22.1% ofservice revenues (up 3.2 percentage pointsyear-on-year) and allowed outgoing ARPU togrow 13.9% year-on-year in local currency.

Revenues in 2008 totalled 2,769 millioneuros (up 23.9% vs. 2007 in local currency),underpinned by strong year-on-year growthin service revenues (up 22.6% in localcurrency), which accelerated in the fourthquarter (up 27.9%) and continued tooutpace growth in the customer base.Worthy of note was the good performancereported by outgoing revenues, whichincreased 31.0% in 2008 in local currency.

Operating income before depreciation and amortisation (OIBDA) in 2008 totalled 1,328 million euros, up 34.0% year-on-year in local currency, thanks to higher revenuesand commercial savings deriving from lower handset subsidies. This left the 2008 margin at 48.0%, an improvement of 3.6 percentage points vs. 2007, and the fourth-quarter margin at 51.5% (up 6.4 percentage points year-on-year).

CapEx in 2008 amounted to 287 millioneuros (down 17.0% in local currency vs.2007), as the Company continued to roll outits GSM and 3G networks and launchedsatellite pay TV service. Operating cash flow(OIBDA-CapEx) totalled 1,042 million euros(up 61.4% in local currency from 2007).

Central America

The penetration rate of the CentralAmerican wireless telephony marketincreased 11 percentage points year-on-year in 2008 to 80%.

Overall, the number of wireless accessesmanaged by Telefónica in the markets inwhich it operates (Guatemala, El Salvador,Panama and Nicaragua) grew 13.8% year-on-year to 5.7 million. In a highlycompetitive environment, where it isnoteworthy the entrance of two newcompetitors in Panamá, Telefónica achieved net adds of 692,168 accesses in Central America in 2008.

Revenues in 2008 totalled 568 millioneuros, a year-on-year increase of 4.2% inconstant euros (+4.5% in constant euroswhen compared to the fourth quarter of2007). Wireless service revenues climbed5.2% in constant euros from 2007.

Operating income before depreciation and amortisation (OIBDA) amounted to 217 million euros in 2008 (down 1.5% inconstant euros), affected by the sale ofspectrum in El Salvador in 2007 (16.4 millioneuros). Excluding this impact, OIBDA wouldhave grown 5.9% in constant euros in 2008 and the OIBDA margin would haveincreased by 0.7 percentage points vs. 2007. OIBDA grew 4.6% in the fourthquarter in constant euros and the OIBDAmargin stood at 43.5%.

CapEx in 2008 amounted to 116 millioneuros (-6.0% versus 2007 in constantcurrency) and operating cash flow (OIBDA-CapEx) was 101 million euros (+4.4% year-on-year compared to 2007 in constant currency).


Ecuador

The Ecuadorian wireless market recordedstrong growth in 2008, with penetrationreaching an estimated 81% by the end ofthe year, 11 percentage points higher thanDecember 2007.

In this context, Telefónica Móviles Ecuadorreported 541,422 wireless net adds in 2008,close to six times the 2007 figure, to reach3.1 million accesses in December 2008(+21.0% year-on-year). In the fourth quarternet adds stood at 165,123. Particularlynoteworthy is the advance of GSM services, with 83% of customers now using this technology (+13 percentagepoints versus 2007) following the closure of the TDMA network.

At the same time MoU rose sharply, driven by commercial campaigns aimed at encouraging top-ups and consumption. As a result, MoU rose by 76.1% in the year to84 minutes, with growth remaining strongin the fourth quarter (99 minutes, +70.9%year-on-year).

This increase in consumption is reflected in ARPU, which advanced 8.9% year-on-yearin local currency after recording a solid increase of 14.0% in the fourth quarter of 2008.

Revenues in 2008 amounted to 318 millioneuros, up 16.8% in local currency from 2007.Particularly noteworthy is the increase inservice revenues (+20.8% in local currencyversus 2007), driven by the growth inoutgoing revenues (+28.0% from 2007). In the fourth quarter of 2008, revenuesgrew 7.4% compared with the same period of 2007.

Operating income before depreciation andamortisation (OIBDA) totalled 92 millioneuros, up 35.0% year-on-year in localcurrency, thanks to economies of scale andimproved efficiency. As a result, the OIBDAmargin stood at 29.0%, up 3.9 percentagepoints from 2007. In the fourth quarter of2008, OIBDA grew 38.4% in local currencyand OIBDA margin reached 33.7% (+6.9percentage points).

CapEx in 2008 amounted to 124 millioneuros, including investment associated with the renewal of the concession for its wireless telephony and internationallong-distance licences for the next 15 years until 2023. Excluding this investment(61 million euros), CapEx in local currencywould have grown by 13.4% due to thestrong growth in traffic and networkcoverage improvements.

Operating cash flow (OIBDA-CapEx)was affected by the renewal of the licenceand, excluding this impact, it would haveincreased by 128.9% in local currency to 29 million euros.

Telefónica InternationalWholesale Services (TIWS)

Revenues at TIWS in 2008 totalled 324 million euros, up 21.3% year-on-year in constant euros.

TIWS enjoyed significant growth across all its business lines. In 2008, revenues from International Capacity climbed 45.5% in constant euros, while revenuesfrom Corporate Services (Virtual PrivateNetworks) rose 23.6%. Revenues fromSatellite Services were up 11.5%. IP Interconnection Services accounted for 46% of total revenues, up 12.5% year-on-year in constant euros.

Revenue growth was reflected in improvedoperating income before depreciation andamortisation (OIBDA), which rose 19.4%year-on-year in constant euros, stepping up the pace registered in the first ninemonths (+13.3% year-on-year in constanteuros). OIBDA totalled 102 million euros in the full year with a margin of 31.3%,virtually unchanged from December 2007 (-0.6 percentage points).




Telefónica LatinoaméricaAccesess

2007 2008



Fixed telephony accesses125,381.0 25,595.4 25,757.6 25,758.2 25,644.5 1.0


Narrowband21,815.6 1,752.9 1,635.3 1,587.9 1,445.8 (20.4)

Broadband3 45,035.9 5,237.2 5,525.8 5,875.7 6,067.0 20.5

Other5103.4 109.8 114.0 108.8 117.0 13.1

Mobile accesses6100,542.2 103,676.7 113,459.6 118,269.8 123,385.2 22.7

Contract 83,162.9 85,634.0 93,527.9 97,713.7 102,329.7 23.0

Pre-Pay 17,379.3 18,042.7 19,931.7 20,556.1 21,055.5 21.2

Pay TV 1,163.8 1,240.4 1,353.6 1,460.5 1,540.5 32.4

Wholesale Accesses 62.6 56.0 57.6 69.6 59.0 (5.7)

Total Accesses 134,104.4 137,668.4 147,903.4 153,130.5 158,259.0 18.0

1 PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company’s accesses for internal use included. Total ‘fixed wireless’ accesses included.2 Includes narrowband ISP of Terra Brasil and Terra Colombia.3 Includes broadband ISP of Terra Brasil, Telefónica de Argentina, Terra Guatemala and Terra México.4 Includes ADSL, optical fiber, cable modem, broadband circuits and Telefónica de Argentina ISP in the North part of the country.5 Retail circuits other than broadband.6 ncludes accesses of Telemig from April 2008.

Notes:• As of 31 December 2006, Group accesses have been reclassified, including ‘fixed wireless’ accesses under the caption of fixed telephony. These accesses were previously classified, depending

on the country, under mobile or fixed accesses.• As of 1 January 2008, ‘fixed wireless’ public telephony accesses are included under the caption of fixed telephony accesses.

Telefónica LatinoaméricaConsolidated income statement


Revenues 22,174 20,078 10.4 5,863 5,402 8.5

Internal exp capitalized in fixed assets 108 105 3.4 27 36 (25.7)

Operating expenses (14,098) (13,422) 5.0 (3,629) (3,783) (4.1)

Other net operating income (expense) 180 363 (50.5) 81 163 (50.3)

Gain (loss) on sale of fixed assets 81 (3) c.s. 74 (6) c.s.Impairment of goodwill and other assets (0) 0 c.s. (0) 0 c.s.


OIBDA Margin 38.1% 35.5% 2.6 p.p. 41.2% 33.5% 7.7 p.p.

Depreciation and amortization (3,645) (3,559) 2.4 (928) (1,010) (8.1)

Operating income (OI) 4,800 3,562 34.8 1,488 802 85.6

Notes:• OIBDA and OI before management and brand fees.• Starting April 2008, Vivo consolidates Telemig.

Telefónica LatinoaméricaAccesess by countries (I)

2007 2008

Unaudited figures (Thousands) December March June September December % Chg y-o-y

BrazilFinal Clients Accesses 48,963.1 49,906.5 56,098.3 58,165.3 60,704.9 24.0



Narrowband 1,155.9 1,133.6 1,055.2 1,079.2 996.4 (13.8)

Broadband22,069.6 2,167.7 2,297.1 2,458.3 2,557.8 23.6

Other363.1 68.0 70.8 64.4 71.6 13.5

Mobile accesses433,483.5 34,323.0 40,434.8 42,276.6 44,945.0 34.2

Pre-pay 27,236.4 27,849.8 32,689.9 34,161.5 36,384.0 33.6

Contract 6,247.1 6,473.2 7,745.0 8,115.1 8,561.0 37.0

Pay TV 230.9 282.3 346.9 426.1 472.2 104.5


Total Accesses 49,000.5 49,940.5 56,133.3 58,212.4 60,739.1 24.0

ArgentinaFinal Clients Accesses 19,462.1 19,587.3 19,999.2 20,533.4 20,717.0 6.4


Fixed wireless 104.3 98.1 90.1 13.2 22.4 (78.5)


Narrowband 312.2 264.5 249.4 215.9 182.8 (41.4)

Broadband2819.3 885.3 966.4 1,046.2 1,082.0 32.1

Other318.4 18.5 18.9 19.5 19.5 5.8

Mobile accesses 13,629.7 13,754.8 14,108.4 14,652.7 14,829.6 8.8

Pre-pay 8,836.0 8,865.6 9,003.9 9,473.6 9,687.6 9.6

Contract 4,793.7 4,889.2 5,104.6 5,179.0 5,142.0 7.3

Wholesale Accesses 9.3 9.4 9.8 10.1 10.0 7.8

Total Accesses 19,471.4 19,596.8 20,009.0 20,543.4 20,726.9 6.4

ChileFinal Clients Accesses 9,361.7 9,482.8 9,709.4 9,816.7 10,002.7 6.8


Internet and data accesses 686.8 679.1 709.3 728.7 743.8 8.3

Narrowband 31.8 22.1 20.7 19.7 18.7 (41.3)

Broadband 2646.0 648.1 679.8 700.2 716.6 10.9

Other38.9 8.8 8.8 8.8 8.6 (4.0)

Mobile accesses 6,282.7 6,432.0 6,611.3 6,702.6 6,875.0 9.4

Pre-pay 4,742.2 4,797.1 4,850.0 4,856.3 4,956.0 4.5

Contract 1,540.5 1,634.9 1,761.3 1,846.3 1,919.0 24.6

Pay TV 219.9 231.6 240.8 250.9 263.0 19.6


Total Accesses 9,377.2 9,494.9 9,721.8 9,828.8 10,014.3 6.8

1 PSTN (including Public Use Telephony) x1; ISDN Basic access x1, ISDN Primary access, 2/6 Access x30. Company’s accesses for internal use included. Total fixed wireless accesses included.2 Includes ADSL, optical fiber, cable modem and broadband circuits.3 Retail circuits other than broadband.4 Includes accesses of Telemig from April 2008.

Notes:• As of 31 December 2006, Group accesses have been reclassified, including ‘fixed wireless’ accesses under the caption of fixed telephony. Till December 2007, these accesses were classified,

depending on the country, under mobile or fixed accesses.• As of 1 January 2008, ‘fixed wireless’ Public Use Telephony accesses are included under the caption of ‘fixed wireless’.




Telefónica LatinoaméricaAccesess by countries (II)

2007 2008


PeruFinal Clients Accesses 12,173.8 12,839.9 13,542.8 14,300.9 14,982.6 23.1

Fixed telephony accesses12,843.4 2,867.7 2,893.1 2,941.5 2,986.5 5.0

Fixed wireless 290.0 321.4 349.2 412.0 485.5 67.4


Narrowband 40.3 33.9 34.1 21.5 17.7 (56.1)

Broadband2572.1 594.2 626.8 669.8 698.4 22.1

Other310.7 11.2 11.5 11.9 12.8 19.4

Mobile accesses 8,067.3 8,699.4 9,324.0 10,010.1 10,612.7 31.6

Pre-pay 7,238.1 7,826.1 8,411.1 9,036.7 9,575.2 32.3

Contract 829.2 873.3 912.9 973.4 1,037.5 25.1

Pay TV 640.0 633.4 653.2 646.0 654.5 2.3


Total Accesses 12,174.3 12,840.3 13,543.2 14,301.3 14,983.0 23.1

ColombiaFinal Clients Accesses 10,973.8 11,484.3 12,116.7 12,516.9 12,800.5 16.6



Narrowband 0.0 0.3 0.3 0.3 0.3 n.m.Broadband2

200.3 238.3 294.0 355.1 393.9 96.7

Other30.0 1.3 1.5 1.6 1.7 n.m.

Mobile accesses 8,372.1 8,754.5 9,358.5 9,702.0 9,963.1 19.0

Pre-pay 6,612.9 6,931.7 7,506.0 7,959.7 8,327.3 25.9

Contract 1,759.2 1,822.8 1,852.5 1,742.2 1,635.8 (7.0)

Pay TV 72.9 93.0 112.6 137.5 142.3 95.1

Wholesale Accesses 0.0 0.0 0.0 0.0 2.9 n.m.

Total Accesses 10,973.8 11,484.3 12,116.7 12,516.9 12,803.4 16.7

MexicoMobile accesses 12,534.1 13,258.6 14,114.2 14,662.0 15.330.6 22.3

Pre-pay 11,833.7 12,492.6 13,288.9 13,779.2 14.432.4 22.0

Contract 700.4 766.0 825.4 882.8 898.1 28.2

Fixed Wireless 3.6 47.7 62.5 99.4 133.6 n.m.

Total Accesses 12,537.6 13,306.3 14,176.7 14,761.3 15,464.2 23.3

VenezuelaMobile accesses 9,434.0 9,311.1 9,841.2 10,280.2 10,584.0 12.2

Pre-pay 8,900.3 8,771.8 9,238.5 9,659.7 9,970.7 12.0

Contract 533.7 539.3 602.7 620.5 613.3 14.9

Fixed Wireless 995.9 1,043.6 1,242.5 1,281.8 1,312.8 31.8

Pay TV 0.0 0.0 0.0 0.0 8.5 n.m.

Total Accesses 10,429.9 10,354.7 11,083.8 11,562.0 11,905.3 14.1

1 PSTN (including Public Use Telephony) x1; ISDN Basic access x1, ISDN Primary access, 2/6 Access x30. Company’s accesses for internal use included. Total ‘fixed wireless accesses included.2 Includes ADSL, optical fiber, cable modem and broadband circuits.3 Retail circuits other than broadband.



Telefónica LatinoaméricaAccesess by countries (III)

2007 2008


Central America1

Fixed telephony accesses2393.4 419.3 429.2 435.2 437.2 11.1

Fixed Wireless 268.2 272.4 281.4 276.7 278.7 3.9

Internet and data accesses 22.0 20.9 20.1 19.3 18.4 (16.3)

Broadband319.8 19.1 18.2 17.3 16.5 (16.8)

Other42.2 1.9 1.8 1.9 1.9 (12.5)

Mobile accesses 5,009.9 5,256.6 5,530.2 5,665.8 5,702.0 13.8

Pre-pay 4,628.6 4,881.7 5,152.1 5,281.6 5,315.3 14.8

Contract 381.2 375.0 378.1 384.1 386.7 1.4

Total Accesses 5,425.3 5,696.9 5,979.5 6,120.2 6,157.6 13.5

EcuadorMobile accesses 2,581.1 2,675.8 2,862.2 2,957.4 3,122.5 21.0

Pre-pay 2,177.5 2,251.9 2,406.4 2,491.5 2,650.5 21.7

Contract 403.6 423.9 455.8 465.9 472.0 16.9

Fixed Wireless 1.3 83.6 82.7 85.5 89.4 n.m.

Total Accesses 2,582.4 2,759.4 2,944.9 3,042.9 3,211.9 24.4

UruguayMobile accesses 1,147.8 1,210.8 1,274.7 1,360.6 1,420.7 23.8

Pre-pay 957.0 965.8 981.3 1,013.8 1,030.6 7.7

Contract 190.8 245.0 293.5 346.7 390.1 104.5

Total Accesses 1,147.8 1,210.8 1,274.7 1,360.6 1,420.7 23.8

1 Includes Guatemala, Panamá, El Salvador and Nicaragua.2 PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access, 2/6 Access x30. Company’s accesses for internal use included. Total ‘fixed wireless’ accesses included.3 Includes ADSL, optical fiber and broadband circuits.4 Retail circuits other than broadband.






Telefónica Latinoamérica: wireless businessselected operating data by country

2007 2008 % Chg y-o-yUnaudited figures Q4 Q1 Q2 Q3 Q4 Local Cur

Brazil1

MoU (minutes) 80 75 94 89 85 7,4

ARPU (EUR) 12.3 11.7 10.9 12.0 10.0 (7.1)

Argentina

MoU (minutes) 67 64 78 79 83 23.9

ARPU (EUR) 8.5 7.9 8.1 8.9 9.8 14.3

Chile

MoU (minutes) 119 120 122 122 127 7.5

ARPU (EUR) 13.0 13.5 12.2 11.7 11.7 3.7

Peru

MoU (minutes) 94 97 88 88 89 (5.9)

ARPU (EUR) 6.4 6.4 5.8 5.9 6.1 (9.1)

Colombia

MoU (minutes) 129 125 120 123 124 (3.4)

ARPU (EUR) 8.9 7.3 7.3 6.6 6.2 (27.7)

Mexico

MoU (minutes) 164 142 149 126 127 (22.1)

ARPU (EUR) 9.2 8.6 8.2 8.2 7.9 (6.7)

Venezuela

MoU (minutes) 136 125 132 128 130 (4.2)

ARPU (EUR) 16.5 15.1 15.3 16.7 20.3 15.9

Central America

MoU (minutes) 139 127 129 118 114 (17.8)

ARPU (EUR) 8.6 7.8 7.0 7.1 7.9 (15.4)

Ecuador

MoU (minutes) 58 67 80 88 99 70.9

ARPU (EUR) 6.2 6.3 6.3 6.7 7.4 14.0

Uruguay

MoU (minutes) 70 82 101 130 158 125.1

ARPU (EUR) 8.7 8.3 8.1 8.5 8.7 (2.7)

1 Includes Telemig from April 2008.

Note:MoU and ARPU calculated as a monthly quarterly average.

Telefónica Latinoamérica: wireless businessselected operating data by country

January - DecemberUnaudited figures 2008 2007 % Chg Local Cur

Brazil1

MoU (minutes) 86 77 12.9

ARPU (EUR) 11.2 11.9 (5.8)

Argentina


ARPU (EUR) 8.7 8.5 10.5

Chile

MoU (minutes) 123 106 16.3

ARPU (EUR) 12.3 12.0 8.3

Peru

MoU (minutes) 90 90 0,0

ARPU (EUR) 6.0 7.3 (16.6)

Colombia

MoU (minutes) 124 110 11,8

ARPU (EUR) 6.8 8.8 (21.6)

Mexico

MoU (minutes) 136 145 (6.3)

ARPU (EUR) 8.2 9.3 (4.3)

Venezuela

MoU (minutes) 129 132 (2.2)

ARPU (EUR) 16.9 16.3 11.0

Central America

MoU (minutes) 122 144 (15.2)

ARPU (EUR) 7.4 9.7 (17.7)

Ecuador


ARPU (EUR) 6.7 6.6 8.9

Uruguay

MoU (minutes) 119 56 114.4

ARPU (EUR) 8.4 8.2 (2.4)

1 Includes Telemig from April 2008.

Note: MoU and ARPU calculated as a monthly January-December period average.




Telefónica LatinoaméricaSelected financial data (I)

January - December October - DecemberUnaudited figures (euros in millions) 2008 2007 % Chg % Chg Local Cur 2008 2007 % Chg % Chg LocalCur

BrazilRevenues 8,606 7,662 12.3 12.2 2,041 2,025 0.8 15.8

OIBDA 3,359 3,056 9.9 9.8 826 809 2.2 16.8

OIBDA margin 39.0% 39.9% (0.9 p.p.) 40.5% 39.9% 0.6 p.p.CapEx 1,614 1,087 48.5 48.4 507 431 17.8 29.1

OpCF (OIBDA-CapEx) 1,745 1,970 (11.4) (11.5) 319 378 (15.6) 2.4

Vivo1

Revenues 2,932 2,396 22.4 22.3 730 656 11.3 26.8

OIBDA 825 613 34.6 34.5 209 175 19.7 35.9

OIBDA margin 28.2% 25.6% 2.6 p.p. 28.7% 26.7% 2.0 p.p.CapEx 739 358 106.2 106.1 210 183 14.5 26.1

OpCF (OIBDA-CapEx) 87 255 (66.0) (66.0) (1) (9) (93.3) (123.2)

TelespRevenues 6,085 5,619 8.3 8.2 1,405 1,465 (4.1) 10.6

OIBDA 2,515 2,443 2.9 2.8 617 633 (2.6) 11.4

OIBDA margin 41.3% 43.5% (2.1 p.p.) 43.9% 43.2% 0.7 p.p.CapEx 875 729 20.1 20.0 297 247 20.3 31.3

OpCF (OIBDA-CapEx) 1,639 1,714 (4.4) (4.5) 320 386 (17.3) (1.5)

ArgentinaRevenues 2,527 2,264 11.6 21.3 725 586 23.8 20.7

OIBDA 919 788 16.6 26.7 291 170 71.3 65.7

OIBDA margin235.2% 33.5% 1.8 p.p. 39.1% 28.0% 11.1 p.p.

CapEx 344 289 19.4 29.7 157 109 44.0 47.7

OpCF (OIBDA-CapEx) 574 499 15.1 25.0 134 61 120.2 94.7

T. Móviles ArgentinaRevenues 1,585 1,353 17.2 27.3 457 353 29.6 26.6

OIBDA 514 418 22.8 33.4 181 129 40.0 40.1


OpCF (OIBDA-CapEx) 360 295 22.0 32.6 82 77 5.4 1.0

Telefónica de Argentina Revenues 1,027 984 4.4 13.5 291 252 15.5 12.5

OIBDA 405 370 9.5 19.0 111 42 166.6 135.5

OIBDA margin234.4% 32.1% 2.3 p.p. 33.6% 14.2% 19.5 p.p.

CapEx 191 165 15.4 25.4 58 58 0.9 0.8

OpCF (OIBDA-CapEx) 214 205 4.7 13.8 53 (16) c.s. c.s.

ChileRevenues 1,936 1,814 6.7 13.3 474 495 (4.4) 10.2

OIBDA 740 716 3.3 9.7 201 202 (0.7) 13.2

OIBDA margin 38.2% 39.5% (1.3 p.p.) 42.4% 40.8% 1.6 p.p.CapEx 423 418 1.3 7.5 134 133 0,5 13.0

OpCF (OIBDA-CapEx) 316 298 6.1 12.6 67 69 (2.9) 13.5

T. Móviles ChileRevenues 1,051 930 13,1 20.0 264 268 (1.5) 13.3

OIBDA 402 348 15,3 22.4 114 108 4.7 19.0

OIBDA margin 38.2% 37.5% 0.7 p.p. 43.0% 40.4% 2.5 p.p.CapEx 228 220 3.7 10.1 70 72 (3.3) 9.1

OpCF (OIBDA-CapEx) 173 128 35.2 43.5 44 36 20.6 38.5

Telefónica ChileRevenues 974 974 (0.0) 6,1 233 255 (8.6) 5.5

OIBDA 339 368 (7.8) (2.1) 88 93 (5,2) 8.3

OIBDA margin 34.8% 37.7% (2.9 p.p.) 37.7% 36.3% 1.3 p.p.CapEx 195 198 (1.3) 4.7 64 61 5.0 17.5

OpCF (OIBDA-CapEx) 144 170 (15.3) (10.1) 24 32 (25.0) (9.3)

1 50% of Vivo. Includes Telemig from April 2008.2 Margin over revenues includes fixed to mobile interconnection.Note: OIBDA is presented before management and brand fees.


Telefónica LatinoaméricaSelected financial data (II)

January - December October - DecemberUnaudited figures (euros in millions) 2008 2007 % Chg % Chg Local Cur 2008 2007 % Chg % Chg Local Cur

PeruRevenues 1,627 1,513 7.5 7.6 459 388 18.4 11.8

OIBDA 621 482 28.9 29.0 189 56 n.m. n.m.OIBDA margin 38.2% 31.9% 6.3 p.p. 41.1% 14.4% 26.7 p.p.CapEx 289 281 2.7 2.8 160 125 28.1 25.7


T. Móviles PerúRevenues 773 603 28.3 28.4 229 173 32.3 25.5

OIBDA 266 162 64.5 64.6 89 54 65.9 58.9

OIBDA margin 34.4% 26.9% 7.6 p.p. 39.1% 31.2% 7.9 p.p.CapEx 144 155 (6.9) (6.8) 85 74 15.2 13.4

OpCF (OIBDA-CapEx) 122 7 n.m. n.m. 4 (20) c.s. c.s.

Telefónica del Perú1

Revenues 977 1.031 (5.2) (5.1) 266 245 8.5 2.1



ColombiaRevenues 1,490 1,569 (5.0) (3.9) 359 431 (16.7) (13.8)

OIBDA 515 503 2.4 3.6 135 161 (16.2) (13.2)

OIBDA margin 34.6% 32.0% 2.5 p.p. 37.6% 37.4% 0.2 p.p.CapEx 420 360 16.6 17.9 168 213 (21.4) (19.1)

OpCF (OIBDA-CapEx) 95 143 (33.3) (32.5) (33) (52) (37.3) (38.2)

T. Móviles ColombiaRevenues 815 869 (6.2) (5.1) 192 227 (15.5) (12.6)

OIBDA 208 186 12.1 13.4 59 78 (23.9) (21.0)

OIBDA margin 25.6% 21.4% 4.2 p.p. 30.8% 34.3% (3.4 p.p.)CapEx 230 180 27.9 29.3 100 117 (14.8) (12.5)

OpCF (OIBDA-CapEx) (22) 6 c.s. c.s. (41) (39) 3.2 4.9

Telefónica TelecomRevenues 710 739 (4.0) (2.9) 177 212 (16.8) (13.9)

OIBDA 307 317 (3.2) (2.1) 76 83 (9.3) (6.4)

OIBDA margin 43.2% 42.9% 0.3 p.p. 42.9% 39.3% 3.6 p.p.CapEx 190 180 5.3 6.5 68 96 (29.4) (27.1)

OpCF (OIBDA-CapEx) 117 137 (14.4) (13.4) 8 (12) c.s. c.s.

Mexico (T. Móviles México)Revenues 1,631 1,431 14.0 23,8 427 420 1,5 10,9

OIBDA 420 179 134.1 154.2 137 66 108.0 127.0


OpCF (OIBDA-CapEx) 103 (51) c.s. c.s. (23) (11) 119.1 105.0

Venezuela (T. Móviles Venezuela)Revenues 2.769 2.392 15.8 23.9 898 675 32.9 25.3

OIBDA 1.328 1.060 25.3 34.0 462 305 51.7 44.4

OIBDA margin 48.0% 44.3% 3.6 p.p. 51.5% 45.1% 6.4 p.p.CapEx 287 370 (22.4) (17.0) 144 216 (33.5) (32.5)

OpCF (OIBDA-CapEx) 1.042 691 50.8 61.4 319 89 n.m. n.m.

Central America2

Revenues 568 585 (2.9) n.c. 157 146 7.6 n.c.OIBDA 217 236 (8.0) n.c. 68 65 6.0 n.c.OIBDA margin 38.2% 40.3% (2.1 p.p.) 43.5% 44.2% (0.7 p.p.)CapEx 116 133 (12.6) n.c. 62 69 (10.7) n.c.OpCF (OIBDA-CapEx) 101 103 (2.2) n.c. 6 (5) c.s. n.c.

Ecuador (T. Móviles Ecuador)Revenues 318 291 9.2 16.8 93 80 16.1 7.4

OIBDA 92 73 26.2 35.0 31 21 46.0 38.4


OpCF (OIBDA-CapEx) (32) 13 c.s. c.s. (59) (10) n.s. n.s.

1 Telefónica del Perú includes ‘Cable Mágico’.2 Includes Guatemala, Panamá, El Salvador and Nicaragua.Note: OIBDA is presented before management and brand fees.


Telefónica LatinoaméricaSelected financial data (III)


Uruguay (T. Móviles Uruguay)Revenues 150 104 44.5 37.8 43 32 36.6 31.9

OIBDA 48 28 72.5 64.5 17 10 68.2 61.9


OpCF (OIBDA-CapEx) 24 13 83.4 74.9 6 4 56.8 51.7

TIWSRevenues 324 275 18.1 21.3 89 73 22.3 18.0

OIBDA 102 88 15.9 19.4 27 18 50.0 43.4

OIBDA margin 31.3% 31.9% (0.6 p.p.) 30.0% 24.6% 5.4 p.p.CapEx 51 54 (5.7) (1.3) 25 24 5.9 5.3


Note: OIBDA is presented before management and brand fees.

Telefónica Europe had a strong performance in 2008, despite a worseeconomic environment and changingpatterns in customer behaviour. With themarkets being affected unequally, the maincommon strength across Telefónica Europehas been the delivery of new propositionsthat anticipated customer needs in thecurrent environment.

At the end of December 2008, TelefónicaEurope total customer base reached 45.8 million (+9.0% year-on-year). Mobilecustomer net additions for the year were 2.9 million, reaching a total mobilecustomer base of 41.2 million at the end ofDecember (+7.6% year-on-year), with goodperformance in both contract and prepaysegments across the markets. The fourthquarter saw 0.7 million net additions, 28.1%less than in the same period of 2007, as the businesses adapted their commercialstrategies to the new market environment.

Revenues in 2008 showed resilient year-on-year growth of 5.9% on a like-for-like basis1

to reach 14,308 million euros, leveragingTelefónica O2 UK’s solid year-on-year totalrevenue growth of 10.6% in local currency,as well as building on positive year-on-yeargrowth at Telefónica O2 Germany, withmobile service revenue positive in thefourth quarter. Reported revenues for theyear showed a decline of 1.0%, while for the fourth quarter they were down 1.7% year-on-year, mainly impacted by sterling/euro depreciation in the period and the exclusion of Airwave.

Operating income before depreciation andamortization (OIBDA) in 2008 recorded asignificant 4.7% year-on-year growth on a like-for-like basis2, totalling 4,180 millioneuros, mainly driven by revenue growth anda more focused commercial approach, withthe restructuring measures taken in thefourth quarter of 2007 already showingbenefits. On a reported basis, OIBDA in 2008showed a year-on-year decline of 16.0%,reflecting the proceeds from the disposal of Airwave in the second quarter of last year (1,296 million euros), and the weakersterling/euro exchange rate. In the fourthquarter, OIBDA increased 34.0% year-on-year, mainly due to restructuring chargestaken in the same period of 2007, as well as 60 million euros registered in the fourthquarter of 2008 as a result of an additionalapplication of provisions made in respect of potential contingencies deriving from the past disposal of shareholdings, oncethese risks had dissipated or had notmaterialized, being the total amount for 2008 174 million euros.

OIBDA margin of 29.2% in 2008 wascomparable to 2007 (-0.3 percentage points) on a like-for-like basis2, while for the quarter was 30.6%, 0.6 percentagepoints higher than in the same period of 2007 on a like-for-like basis2.

CapEx for the year was 2,072 million euros, a year-on-year increase of 2.9% on a like-for-like1 basis. Operating cash flow(OIBDA-CapEx) in 2008 totalled 2,108million euros, a significant increase of 6.7%year-on-year on a like-for-like2 basis.

Telefónica O2 UK

Telefónica O2 UK outperformed the marketin 2008 in all main financial and operatingmetrics despite the worse economicenvironment, with a balanced approach inthe growth-efficiency equation that helpedto sustain its leadership position.

It is also noteworthy that Telefónica O2 UK has topped the list of fixed and mobilebroadband internet service providers (ISPs) in the UK for customer satisfaction,according to a recent report by JD Powerand Associates, as well as leading oncustomer satisfaction for the overall mobilebusiness among the mobile networkoperators. The marketing firm conductedtwo customer satisfaction studies based onfive factors that drive overall satisfactionwith the provision of mobile and fixed broadband: i) performance and reliability; ii) billing; iii) cost; iv) customerservice/technical support; and v) offerings/promotions.

Net mobile additions in the year reached 1.1 million (+45.3% year-on-year), endingDecember 2008 with a total mobile baseof 19.5 million lines (which excludes TescoMobile), with a 5.9% year-on-year growth. In the fourth quarter of the year, TelefónicaO2 UK recorded net mobile customeradditions of 390,365.

Results by regional business unitsTelefonica Europe


1 Assuming constant exchange rates and excluding the consolidation of Airwave in the first quarter of 2007.2 Assuming constant exchange rates and excluding the consolidation of Airwave in the first quarter of 2007. Capital gain from the sale of Airwave is also excluded, as well as gains related to

the real estate sale in the Czech Republic, restructuring and similar charges and the result of the application of provisions made in respect of potential contingencies deriving from the pastdisposal of shareholdings, once these risks had dissipated or had not materialized.

After adding 798,690 contract customers in 2008 (+35.2% year-on-year), at the end of December contract customers made up39.1% of the total base (37.0% in December2007). This reflects the focus on highervalue customers across various segments,market leading churn levels, as well as thestrength of propositions such as Simplicity,the iPhone (3G), mobile broadband, and the continued prepay to contract migration.In the fourth quarter, contract net additionstotalled 177,116.

A total number of 289,176 prepay customerswere added in 2008, a year-on-year growthof 82.7% to reach 11.9 million customers. In a seasonally strong quarter, prepaycustomers grew by 213,249, with newpropositions also being introduced in thequarter, such as prepay mobile broadband,and prepay iPhone.

It is worth highlighting the 1.3% marketleading contract churn achieved in thefourth quarter down from the 1.5% in the first quarter, reflecting the correctcommercial focus of the company alongsidemarket leading customer satisfaction levelsin the current environment (contract churnfor the year went down from 1.7% in 2007 to 1.4% in 2008). Blended churn was 2.7%for the full year, down from 2.9% in 2007.

MoU showed a robust 9.1% year-on-yeargrowth to reach 207 minutes in 2008,mainly due to an increasing number of prepay customers benefiting frompropositions such as Unlimited, whilecontract customers were optimizing theirvoice bundle utilisation in the currentenvironment. In the fourth quarter, MoUreached 213 minutes (+8.0% year-on-year).

Telefónica O2 UK’s total ARPU reached 30.0euros in 2008, a 1.4% year-on-year growth in local currency as a result of improvedcustomer mix. In the fourth quarter it was 1.7% down year-on-year in localcurrency, reflecting the declines in bothcontract and prepay voice ARPUs, beingpartially compensated by continued growth in data ARPU.

In 2008, contract ARPU showed a year-on-year decline of 2.1% in localcurrency, due to the continued migrationprocess from prepay to contract andcustomer propositions, such as Simplicity,which better fit customers’ expectations in the current environment, as well as the continued optimising behaviour ofcustomers when using voice bundles.Prepay ARPU for the year declined 0.6% over 2007 in local currency, again reflectingthe above mentioned migration process and also increased uptake of prepay tariffs such as Unlimited.

Data ARPU had a very strong performancein 2008, with a year-on-year increase inlocal currency of 9.2% to 10.3 euros (+6.6%year-on-year in local currency in the fourthquarter), mainly driven by an increase in thenumber of mobile broadband connections(a new prepay proposition was launched inthe fourth quarter), as well as the continuedsuccess of data bolt-ons. Non-SMS datarevenues increased 55.4% year-on-year in local currency in the year.

Telefónica O2 UK’s DSL broadband serviceadded 270,157 lines in 2008, and finishedthe year with market leading customersatisfaction numbers. The business hadanother strong quarter with 73,776 netadditions, leaving the total broadbandcustomer base at 340,866 lines at the end of December.

Revenues for the year were 7,052 millioneuros, an increase of 10.6% year-on-year in local currency. In the fourth quarterrevenues grew by 10.4% year-on-year inlocal currency, an acceleration compared tothe previous quarter (+8.7%), reflecting thedifferent timing for handsets shipmentscompared to the previous year (which willnot occur in the next quarter), as well as increased activity around the iPhonetowards the end of the year. Mobile servicerevenue for the year totalled 6,435 millioneuros, an increase of 10.0% year-on-year inlocal currency, and in the fourth quartershowed a growth rate of 8.0% year-on-yearin local currency, lower than in the thirdquarter due to declining voice ARPUs, beingoffset by customer growth and the mobiledata business.

Operating income before depreciation andamortization (OIBDA) totalled 1,839 millioneuros in 2008, an 11.1% year-on-year growthin local currency (+9.1% on a like-for-likebasis3), leveraging more focused commercialcampaigns, ongoing efficiency savings and market leading contract churn. For the fourth quarter OIBDA rose 12.3% year-on-year in local currency, while on a like-for-like basis3 it was 8.1% higher.

OIBDA margin for the year was 26.1% (0.4 percentage points lower than in 2007 on a like-for-like basis3), as customerinvestments in the new DSL and mobilebroadband propositions throughout theyear were partially compensated byefficiency improvements. In the fourthquarter, margin was 27.3%, compared to26.8% in the same quarter of 2007 (27.8% on a like-for-like basis3).

CapEx for the year amounted to 717 millioneuros (+0.1% year-on-year in local currency),with operating cash flow (OIBDA-CapEx)amounting to 1,122 million euros (+15.7%year-on-year on a like-for-like basis3).


3 Excluding restructuring charges in 2007

Telefónica O2 Germany

In the fourth quarter of 2008, Telefónica O2 Germany returned to positive mobileservice revenue growth despite a highlycompetitive and overall smaller market. At the end of December, the business had successfully built on its foundationsstrategy, with the infrastructure of thenetwork on track, the distribution networkahead of target (725 shops at year end), and the customer migration program from legacy to new tariffs completed. Thebusiness has seen also a significant increasein OIBDA margin leveraged on the successof customer propositions such as the O2Handy flatrate (only six-months contract), as well as the launch in the fourth quarterof a commercial approach towards a newand more efficient acquisition and retentionconcept, that had an encouraging start inthe direct channels.

In 2008, Telefónica O2 Germany’s mobilecustomer base grew by 1.7 million (19.4%higher than last year), of which 952,794came from partner channels, includingHanseNet, Tchibo, Fonic, Schlecker and M-Net, taking the mobile customer base to 14.2 million (+13.8% vs. December 2007). In the fourth quarter, mobile net additionswere 220,159, a decrease of 27.4% over thesame period of last year, after disconnectingmore than 240,000 inactive prepay lines. It should be pointed out that this decisionhad no impact on the business’ economicand financial performance.

The mobile contract base increased by730,418 in 2008 to reach 7.0 millioncustomers (+11.7% year-on-year), with 85,895 net additions in the fourth quarter.Contract customers made up 49.1% of thetotal mobile base at the end of Decembervs. 50.0% at December, 2007. A total of996,514 prepay customers were added inthe year (+44.3% year-on-year) to give aprepay base of 7.2 million customers at theend of December (+16.0% year-on-year),with 134,264 prepay customers being added in the fourth quarter, after the above mentioned disconnections.

In 2008, churn rate increased 0.1 percentagepoints year-on-year to 2.0% and was lowerby 0.7 percentage points year-on-year in thequarter at 2.4%.

MoU showed a 5.3% year-on-year increase in 2008 to reach 138 minutes, while itdecreased 3.8% year-on-year in the fourthquarter, as previous flat rate promotions on prepay were expired in the quarter.

Total ARPU for the year was 17.4 euros (-14.9% year-on-year), mainly due to thecompletion of base migration to tariffs suchas Genion and Inklusivpakete, successfullyachieved before year end, as well as theimpact from the cut in mobile terminationrates from November 2007. However, thefourth quarter saw a better year-on-yearperformance (-13.2%) than the previousquarter (-16.8%). Contract ARPU for the year fell 15.0% year-on-year to reach 29.0euros, while prepay ARPU decreased 11.0% year-on-year.

Data ARPU for the year was 4.8 euros (-5.8% year-on-year), while in the fourthquarter was 7.0% lower than the sameperiod of last year due to the impact onSMS usage from the introduction of bettervalue tariffs and flat rate voice promotions.It is important to highlight that non-SMSdata revenues grew 25.7% year-on-year in2008, mainly driven by mobile broadband‘Surfsticks’ and web browsing packs.

In 2008, 140,079 O2 DSL customers wereadded to reach a total customer base of 214,783 at the end of December, with 16,713 customers acquired in the fourthquarter. Telefónica Deutschland reported 1.3 million ULL lines in total at the end ofDecember, compared to 0.7 million lines at the end of December 2007.

Revenues totalled 3,595 million euros in2008 (+1.5% year-on-year), with mobileservice revenues (2,869 million euros, down1.1% year-on-year) and wholesale fixedbroadband revenues (435 million euros, up 44.3% year-on-year) being the maincontributors to the performance of thebusiness. It’s important to highlight thatthe fourth quarter of the year saw positive

mobile service revenue growth (+0.7% year-on-year), leveraged on the better year-on-year performance of ARPU coupled with customer growth.

Operating income before depreciation andamortization (OIBDA) for the year totalled770 million euros, a 62.9% year-on-yeargrowth, while on a like-for-like basis4 OIBDAgrew by 6.6% year-on-year. This increase in the profitability level of the business (+1.0 percentage points on a like-for-likebasis4 to reach a 21.4% margin in 2008) was the result of success of thebusiness building on its foundations (lessdependence on national roaming, improveddistribution network and the completion ofthe tariff migration process), as well as thenew commercial approach introduced in thefourth quarter, which significantly reducedacquisition and retention costs.

CapEx amounted to 924 million euros for2008 (+8.7% year-on-year), mainly as aresult of the acceleration of the mobilenetwork rollout in line with Telefónica O2 Germany’s network investment plans (2G coverage reaching 99% pop and datacoverage including HSDPA and EDGE nowreaching 78% pop), and the acceleration of the distribution network.

Operating cash flow (OIBDA-CapEx)amounted to -154 million euros in 2008 (-377 million euros in 2007).

Results by regional business unitsTelefónica Europe


4 Excluding restructuring charges in 2007.

Telefónica O2 Ireland

In a more challenging economicenvironment, Telefónica O2 Ireland hascontinued to improve its operating andfinancial metrics throughout 2008,particularly during the fourth quarter of the year. The business recorded netadditions of 81,561 lines in the year and14,589 in the fourth quarter to reach a total customer base of 1.7 million customersat the end of December, 5.0% higher than a year ago.

The contract market continues to drivegrowth for Telefónica O2 Ireland with 87,864 contract customers added in the year (+25.3% year-on-year) and 12,513 in thefourth quarter, to give a closing year endcontract base of 643,091 lines. Key drivers of this performance include strong progressin the business market, continuedmomentum in mobile broadband and thesuccess of the new O2 Clear propositions.Building on momentum from the O2Experience offer, launched in February 2008, and the success of December’s O2Treat card campaign, prepay net adds for the year were -6,303 customers, asignificant improvement over 2007. On aquarterly basis, there were 2,076 prepay net additions in the fourth quarter (a significant improvement on the -12,409lines reported in the previous quarter). The prepay base reached 1.1 million lines at the end of December.

Churn reached 2.8% in the year, showing an increase of 0.2 percentage points year-on-year. Contract churn rose as a result of the trading environment, whileprepay churn remained broadly stablethroughout the year.

MoU for the full year fell 1.1% year-on-yearto 245 minutes, with a decline of 3.6% in thequarter. This was driven by an increasingnumber of mobile broadband lines in thebase, contract customers optimising theirusage, as well as voice to text substitutionon prepay O2 Experience tariffs.

Total ARPU reached 43.2 euros in 2008 (-5.9% year-on-year), while in the fourthquarter it was 6.8% lower year-on-year thanin the same period of last year. Prepay ARPUdeclined 7.0% year-on-year in the year and7.9% in the fourth quarter on the back ofnew and existing customers adopting newvalue-for-money price plans such as O2Experience. Contract ARPU had a year-on-yeardecline of 11.9% in 2008, while in the fourthquarter was 12.2% lower than the same periodin 2007, mainly due to the growth of mobilebroadband subscriptions and the continuedadoption of the O2 Clear tariffs.

Data ARPU was 7.2% lower in the year at10.8 euros and in the fourth quarter was11.6% lower than the same period last year,driven by customer promotions such as O2Experience offering unlimited SMS (SMSvolumes in 2008 +40.3% year-on-year). Non-SMS data revenues in 2008 grew by 17.1% year-on-year on the back of thegrowing mobile broadband base.

Revenues for the year were 957 millioneuros, a year-on-year decline of 3.4%. Mobileservice revenues for the full year declined2.7% year-on-year to 909 million euros,while they decreased 1.7% year-on-year in the fourth quarter compared to the same period last year, with a decline inARPU partially offset by growth in thecustomer base.

Operating income before depreciation and amortization (OIBDA) for the full year was 301 million euros, 9.5% lower on a like-for-like basis5 vs. 2007, due to lowerrevenues and increased investment toregain momentum in the market. In thefourth quarter the year-on-year OIBDAdecrease was 4.0% on a like-for-like basis5, a marked improvement over the previousquarter (-12.6% year-on-year on a like-for-like basis5). This improvement was in part due to the higher levels ofinvestment in contract in the previousquarter, but also partly due to ongoing cost rationalisation programs and a higher proportion of lower cost SIM-onlyacquisitions in the fourth quarter. OIBDA

margin for the year was 31.5% (2.1 percentage points lower than in 2007 on a like-for-like basis5), while for the fourth quarter it was 30.3% (0.4 percentage points lower than in the same period of 2007 on a like-for-like basis5).

CapEx for the year totalled 83 million euros (-29.6% year-on-year) and operating cash flow (OIBDA-CapEx)amounted to 219 million (+1.4% year-on-year on a like-for-like basis5).


5 Excluding restructuring charges in 2007.

Telefónica O2Czech Republic

Telefónica O2 Czech Republic has deliveredstrong results in 2008 in a very competitivemobile Czech market, while reinforcing its leadership position in the fixed Czechmarket, improving fixed line trends, as well as the continued improvement of the Slovak operations.

At the end of December, the total numberof accesses for Telefonica O2 Czech Republic,including Slovakia, stood at 8.6 million, a slight decrease of 0.6% year-on-year.

Fixed telephony accesses amounted to 1.9 million at the end of December, 8.5%lower than in December, 2007. Underlyingnet losses of fixed telephony amounted to 30,072 accesses in the fourth quarter, a significant improvement of 54.0% year-on-year in the fourth quarter, and by 37.9% in the year, leveraged on a betterevolution of gross additions and lowernumber of disconnections driven byenhancements to fixed line propositionswith broadband and bundled offers. At theend of December, 14.2% of fixed accesseshad a bundled product (+9.6 percentagepoints year-on-year).

Retail Internet broadband accesses reached583,698 (+14.6% year-on-year), with 74,309net additions in the year and 31,518 in thefourth quarter, leveraging a very strongcommercial activity. The total number of O2 TV customers increased by 41,331 in 2008 and by 6,435 in the quarter to reach 114,496 at the end of December.

The total number of mobile customersin the Czech Republic increased by 2.6%year-on-year to reach 5.3 million at the endof December, mainly driven by the increase in the contract customer base (275,387 net additions in the year, and 89,868 in the fourth quarter). Contract customer base at December, 2008 amounted to 2.5 millioncustomers, leveraged on the continuedsuccess of the Neon tariffs. The prepaycustomer base decreased by 143,584

customers in the year and by 20,122customers in the fourth quarter to reach 2.7 million at the end of December,following the active prepay to contractmigration strategy. Telefonica O2 Slovakiaregistered 455,277 customers at the end of December, compared with 565,424customers at the end of 2007, with thecontract customer base increasing duringthe year on the back of the success of the ‘O2 Fér’ customer proposition.

In the Czech Republic, the churn rateincreased 0.1 percentage points in the year to reach 1.6%, and 1.7% in the fourthquarter, 0.2 percentage points higher than in the same period of last year.

MoU in the Czech Republic reached 121minutes in 2008 (+3.6% year-on-year), while in the fourth quarter it increasedyear-on-year by 1.8% due to the highercontract base and the good performance of Neon flat rate tariffs, with close to 270thousand customers opting for one of these tariffs at the end of December.

Total mobile ARPU in the Czech Republicreached 20.7 euros in 2008 (-0.9% year-on-year in local currency), while in the fourth quarter it declined by 1.6%year-on-year in local currency. Lower voiceARPU was partially offset by the 2.8% year-on-year increase in data ARPU in 2008, in local currency to 4.6 euros, as a result of the growth in mobile data customers.

Revenues for the Telefonica O2 CzechRepublic Group showed a 2.9% year-on-year increase in constant currencyin 2008 to reach 2,581 million euros, whilein the fourth quarter they were 4.2%higher year-on-year in constant currency,with ICT and Business Solutions showingan outstanding performance in thequarter. The Czech mobile businesscontinued to be the key driver of theunderlying growth of the Company, withservice revenue growing by 3.9% in 2008and 2.8% year-on-year in local currency in the fourth quarter. Traditional fixedrevenues fell by 9.3% year-on-year in

local currency in 2008, while the declinewas 8.6% in the fourth quarter, with fixed internet, broadband and TV revenues growing by 5.6% year-on-year in local currency in 2008 (+2.0% in thefourth quarter).

Operating income before depreciation andamortization (OIBDA) growth for the yearwas 3.1% year-on-year in constant currencyto reach 1,159 million euros, while in thefourth quarter it increased by 5.1% year-on-year in constant currency. On a like-for-likebasis6, OIBDA increased by 0.8% year-on-year in constant currency in the year. OIBDAmargin for 2008 was 44.9%, slightly betterthan in the previous year, with the Slovakoperation showing a better performance in terms of margin dilution. In the fourthquarter, OIBDA margin was 41.9%, animprovement over the same period of last year.

CapEx for the year totalled 324 million euros(+4.0% year-on-year in constant currency)and operating cash flow (OIBDA-CapEx)amounted to 835 million euros.



6 Excluding restructuring charges, real estate gains and others.

Telefónica EuropeAccesses

2007 2008



Fixed telephony accesses 12,130.0 2,056.5 1,998.1 1,952.3 1,952.7 (8.3)

Internet and data accesses 880.0 996.1 1,101.4 1,212.7 1,354.5 53.9

Narrowband 202.4 188.7 177.0 170.3 163.4 (19.3)

Broadband 670.3 800.2 917.3 1.035.5 1.158.7 72.9

Other27.3 7.2 7.1 6.9 32.4 n.m.

Mobile accesses 38,263.8 38,827.7 39,596.9 40,445.8 41,182.1 7.6

Pre-pay 22,327.7 22,387.7 22,643.0 22,965.1 23,314.4 4.4

Contract 15,936.1 16,440.0 16,953.9 17,480.7 17,867.6 12.1

Pay TV 73.2 87.2 97.9 108.1 114.5 56.5

Wholesale Accesses3706.2 831.3 1.008.1 1.139.0 1.237.9 75.3

Total Accesses 42,053.2 42,798.8 43,802.4 44,857.9 45,841.7 9.0

1 PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company’s accesses for internal use included.2 Remaining non-broadband final circuits.3 Includes Unbundled Lines by T. Deutschland.

Note: Mobile accesses, Fixed telephony accesses and Broadband accesses include MANX customers.

Telefónica EuropeConsolidated income statement


Revenues 14,308 14,458 (1.0) 3,618 3,682 (1.7)

Internal exp capitalized in fixed assets 175 200 (12.4) 43 44 (2.0)


Other net operating income (expense) 181 14 n.m. 63 2 n.m.Gain (loss) on sale of fixed assets 32 1,292 (97.5) (1) (6) (79.6)

Impairment of goodwill and other assets (3) (0) n.m. 0 (0) c.s.

Operating income before D&A (OIBDA) 4,180 4,977 (16.0) 1,107 826 34.0

OIBDA margin 29.2% 34.4% (5.2 p.p.) 30.6% 22.4% 8.2 p.p.

Depreciation and amortization (3,035) (3,386) (10.4) (730) (820) (11.0)

Operating income (OI) 1,144 1,591 (28.1) 377 6 n.s.

Notes:• OIBDA and OI before brand fees.• Airwave is not consolidated since the second quarter of 2007. The disposal of Airwave generated a capital gain of 1,296 million euros, recorded in the second quarter of 2007.• 2008 includes 174 million euros due to the application of provisions made in respect of potential contingencies deriving from the past disposal of shareholdings, once these risks had

dissipated or had not materialized.


Telefónica EuropeAccesses by countries

2007 2008


UKFinal Clients Accesses 18,452.8 18,534.7 18,872.0 19,346.7 19,810.8 7.4

Internet and data accesses 70.7 131.4 194.2 267.1 340.9 n.m.Broadband 70.7 131.4 194.2 267.1 340.9 n.m.

Mobile accesses 18,382.1 18,403.2 18,677.8 19.079.6 19,470.0 5.9

Pre-pay 11,573.4 11,388.1 11,525.1 11.649.3 11,862.5 2.5

Contract 6,808.7 7,015.1 7,152.7 7.430.3 7,607.4 11.7

Total Accesses 18,452.8 18,534.7 18,872.0 19,346.7 19,810.8 7.4

GermanyFinal Clients Accesses 12,546.2 13,132.3 13,741.3 14,176.4 14,413.3 14.9


Broadband 74.7 124.7 165.4 198.1 214.8 187.5

Mobile accesses 12,471.5 13,007.5 13,575.9 13,978.3 14,198.5 13.8

Pre-pay 6,235.0 6,565.4 6,841.4 7,097.2 7,231.5 16.0

Contract 6,236.6 6,442.1 6,734.5 6,881.1 6,967.0 11.7

Wholesale Accesses1596.0 719.9 897.4 1,026.7 1,128.4 89.3

Total Accesses 13,142.3 13,852.1 14,638.7 15,203.1 15,541.7 18.3

IrelandMobile accesses 1,646.1 1,662.9 1,687.6 1,713.1 1,727.7 5.0

Pre-pay 1,090.9 1,089.1 1,094.9 1,082.5 1,084.6 (0.6)

Contract 555.2 573.8 592.6 630.6 643.1 15.8

Total Accesses 1,646.1 1,662.9 1,687.6 1,713.1 1,727.7 5.0

Czech RepublicFinal Clients Accesses 7,986.8 7,964.8 7,946.3 7,917.3 8,044.6 0.7

Fixed telephony accesses 22,069.2 1,995.6 1,937.7 1,892.4 1,893.4 (8.5)


Narrowband 202.4 188.7 177.0 170.3 163.4 (19.3)

Broadband 509.4 527.4 540.4 552.2 583.7 14.6

Other37.3 7.2 7.1 6.9 32.4 n.m.

Mobile accesses 5,125.4 5,158.7 5,186.3 5,187.4 5,257.2 2.6

Pre-pay 2,881.5 2,853.2 2,817.3 2,758.0 2,737.9 (5.0)

Contract 2,243.9 2,305.5 2,369.1 2,429.4 2,519.3 12.3

Pay TV 73.2 87.2 97.9 108.1 114.5 56.5


Total Accesses 8,097.0 8,076.3 8,057.1 8,029.5 8,154.1 0.7

SlovakiaMobile accesses 565.4 523.1 394.7 412.7 455.3 (19.5)

Pre-pay 502.4 449.0 319.8 334.6 356.2 (29.1)

Contract 63.0 74.1 74.9 78.1 99.0 57.2

Total Accesses 565.4 523.1 394.7 412.7 455.3 (19.5)

1 Includes Unbundled Lines by T. Deutschland.2 PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company’s accesses for internal use included. Includes a positive adjustment of 31,000

acceses recorded on December 2008.3 Retail circuits other than broadband.




Telefónica EuropeSelected operating data mobile business by countries

2007 2008

Unaudited figures Q4 Q1 Q2 Q3 Q4 % Chg y-o-y Local Cur

Telefónica O2 UK

MoU (minutes) 197 197 208 208 213 8.0

ARPU (EUR) 33.9 31.1 30.2 30.6 28.1 (1.7)

Pre-pay 18.0 16.2 15.6 15.9 14.4 (5.3)

Contract 61.0 56.0 53.6 54.1 49.6 (3.9)

Data ARPU(EUR) 11.1 10.7 10.3 10.3 10.0 6.6

%non-P2PSMS over data revenues 15.9% 18.3% 18.2% 21.0% 22.2% 6.2 p.p.


MoU (minutes) 134 147 144 133 129 (3.8)

ARPU (EUR) 19.4 17.7 17.6 17.3 16.9 (13.2)

Pre-pay 6.4 5.9 6.1 6.0 5.8 (9.5)

Contract 32.3 29.7 29.3 28.9 28.3 (12.4)

Data ARPU(EUR) 5.1 4.9 4.8 4.9 4.8 (7.0)



MoU (minutes) 252 240 250 246 243 (3.6)

ARPU (EUR) 45.7 43.4 43.2 43.7 42.6 (6.8)

Pre-pay 29.0 26.7 26.9 27.7 26.7 (7.9)

Contract 78.8 75.5 73.8 72.2 69.2 (12.2)

Data ARPU(EUR) 12.4 11.2 10.6 10.6 10.9 (11.6)


Telefónica O2 Czech Republic1

MoU (minutes) 122 117 122 120 124 1.8

ARPU (EUR) 20.5 19.4 21.0 21.7 20.4 (1.6)

Pre-pay 9.7 8.9 9.8 10.2 9.5 (2.7)

Contract 34.5 32.7 34.7 35.1 32.6 (6.6)

Data ARPU(EUR) 4.4 4.4 4.5 4.7 4.7 3.3


1 KPIs for Mobile business in Czech Republic do not include Slovakia.

Note: MoU and ARPU calculated as monthly quarterly average.



Telefónica EuropeSelected operating data mobile business by countries

January - DecemberUnaudited figures 2008 2007 % Chg Local Cur

Telefónica O2 UK


ARPU (EUR) 30.0 34.4 1.4

Pre-pay 15.5 18.1 (0.6)

Contract 53.3 63.2 (2.1)

Data ARPU(EUR) 10.3 11.0 9.2

%non-P2PSMS over data revenues 20.0% 14.8% 5.2 p.p.



ARPU (EUR) 17.4 20.4 (14.9)

Pre-pay 5.9 6.7 (11.0)

Contract 29.0 34.1 (15.0)

Data ARPU(EUR) 4.8 5.1 (5.8)



MoU (minutes) 245 248 (1.1)

ARPU (EUR) 43.2 45.9 (5.9)

Pre-pay 27.0 29.0 (7.0)

Contract 72.5 82.3 (11.9)

Data ARPU(EUR) 10.8 11.7 (7.2)


T. O2 Czech Republic 1


ARPU (EUR) 20.7 18.9 (0.9)

Pre-pay 9.8 8.9 (2.0)

Contract 33.5 32.7 (6.7)

Data ARPU(EUR) 4.6 4.0 2.8


1 KPIs for Mobile business in Czech Republic do not include Slovakia.

Note: MoU and ARPU calculated as monthly January-December period average.

Telefónica EuropeSelected financial data


Telefónica O2 UK

Revenues 7,052 7,403 (4.7) 10.6 1,755 1,877 (6.5) 10.4

OIBDA 1.839 1.923 (4.3) 11.1 479 503 (4.7) 12.3

OIBDA margin 26.1% 26.0% 0.1 p.p. 27.3% 26.8% 0.5 p.p.CapEx 717 832 (13.8) 0.1 198 272 (27.1) (13.7)

OpCF (OIBDA-CapEx) 1.122 1.090 2.9 19.5 281 230 21.8 42.5


Revenues 3,595 3,541 1.5 1.5 931 929 0.2 0.2


OpCF (OIBDA-CapEx) (154) (377) (59.2) (59.2) (67) (228) (70.5) (70.5)


Revenues 957 991 (3.4) (3.4) 243 250 (2.8) (2.8)

OIBDA 301 316 (4.7) (4.7) 74 63 17.4 17.4

OIBDA margin 31.5% 31.9% (0.4 p.p.) 30.3% 25.1% 5.2 p.p.CapEx 83 117 (29.6) (29.6) 29 36 (18.7) (18.7)

OpCF (OIBDA-CapEx) 219 199 10.0 10.0 44 27 65.5 65.5

Telefónica O2 Czech Republic

Revenues 2.581 2.257 14.4 n.c. 651 590 10.3 n.c.OIBDA 1.159 1.010 14.7 n.c. 273 247 10.5 n.c.OIBDA margin 44.9% 44.8% 0.1 p.p. 41.9% 41.9% 0.1 p.p.CapEx 324 281 15.2 n.c. 157 117 34.3 n.c.OpCF (OIBDA-CapEx) 835 729 14.5 n.c. 116 130 (10.9) n.c.

Note: OIBDA before brand fee.


Atento Group

The Atento Group achieved profitablegrowth in 2008, forging ahead with astrategy that seeks to differentiate the Company through quality and value creation for customers and thediversification of its customer portfolio.

Cumulative Revenues advanced 10.8% year-on-year to 1,301 million euros (+13.6% in constant terms) and 7.9% in the fourthquarter. Revenue growth was driven by anincrease in the activity with Telefónica,mainly in Brazil, Peru, Morocco and CentralAmerica. The customer portfolio was furtherdiversified over the year, with multi-sectorcustomers (outside the Telefónica Group)accounting for 53% of revenues. Thesecustomers belong mainly to thetelecommunications and financial sectors in Mexico, Brazil, Venezuela and Argentina.

With regard to the geographical breakdownof revenues, Brazil is the largest contributorto total revenues, with 46% (41% in 2007),followed by Spain with 17% (down from 22% last year due to growing delocalisationin 2008) and Mexico with 12% (13% inDecember 2007). Offshored revenuesaccount for 7% of the Atento Group's total revenues, mainly from Spain toColombia, Peru and Morocco.

Operating income before depreciation andamortisation (OIBDA) grew 15.4% in the full year (+18.6% in constant terms) to 186million euros and 16.3% year-on-year in the fourth quarter of 2008. This growth was driven in one hand by the increasedbusiness and in the other by thecontainment of operating expenses (+9.8% in 2008 vs. +10.8% in the first nine months of the year), especially in the final quarter which saw a particularlydecline in personnel expenses.

The OIBDA margin stood at 14.3% in 2008(+0.6 percentage points from December2007) and at 15.6% in the fourth quarter, an increase of 1.1 percentage points vs. the same period a year earlier.

CapEx stood at 56 million euros (+46.3% inconstant terms) and operating cash flow(OIBDA- CapEx) totalled 130 million euros,up 6.5% in current terms and 9.7% inconstant terms. The CapEx was devotedmainly to build new platforms (Brazil,Venezuela and Peru), refurbish centres and purchase equipment (Brazil, Mexico,Peru and Spain).

The Atento Group ended 2008 with 60,714 positions in place, 14% more than in December 2007.

Results by regional business unitsOther Companies


Atento GroupConsolidated income statement


Revenues 1,301 1,174 10.8 329 305 7.9

Internal exp capitalized in fixed assets 0 0 n.m. 0 0 n.m.Operating expenses (1,117) (1,017) 9.8 (279) (261) 6.8

Other net operating income (expense) 2 2 10.6 1 (0) c.s.Gain (loss) on sale of fixed assets (0) 2 c.s. (0) 0 c.s.

Operating income before D&A (OIBDA) 186 161 15.4 51 44 16.3

OIBDA Margin 14.3% 13.7% 0.6 p.p. 15.6% 14.5% 1.1 p.p.

Depreciation and amortization (33) (30) 7.0 (8) (8) 3.6

Operating income (OI) 154 131 17.4 43 36 19.1


AddendaKey Holdings of the Telefónica Group detailed by regional business units

Telefónica España% Part

Telefónica de España 100.00

Telefónica Móviles España 100.00

Telyco 100.00

Telefónica Telecomunic. Públicas 100.00

T. Soluciones de Informática yComunicaciones de España 100.00

Iberbanda 58.94

Medi Telecom 32.18

Telefónica Latinoamérica% Part

Telesp187.95

Telefónica del Perú 98.18

Telefónica de Argentina 98.20

TLD Puerto Rico 98.00

Telefónica Chile296.75

Telefónica Telecom 52.03

Telefónica USA 100.00

T. Intern. Wholesale Serv. (TIWS)3100.00

Brasilcel450.00

T. Móviles Argentina 100.00

T. Móviles Perú 98.63

T. Móviles México 100.00

Telefónica Móviles Chile 100.00

T. Móviles El Salvador 99.08

T. Móviles Guatemala 100.00

Telcel (Venezuela) 100.00

T. Móviles Colombia 100.00

Otecel (Ecuador) 100.00

T. Móviles Panamá 100.00

T. Móviles Uruguay 100.00

Telefonía Celular Nicaragua 100.00

T. Móviles Solucionesy Aplicac. (Chile) 100.00

1 Effective participation 88.01%.2 Telefónica Internacional de Chile S.A. owns 44.89% and

Inversiones Telefónica Internacional Holding Ltda. owns51.86%. On 9 January 2009 the second takeover offerwas completed increasing Telefónica Group participationover the Chilean company to 97.89%.

3 Telefónica, S.A. owns 92.51% and Telefónica DataCorpowns 7.49%.

4 Joint Venture which fully consolidates the subsidiaryVivo, S.A., through participation at Vivo Participaçoes, S.A.(63.73%).

Other participations% Part

3G Mobile AG (Switzerland) 100.00

Grupo Atento 100.00

Telefónica de Contenidos (Spain) 100.00

Mobipay Internacional 50.00

Telco SpA (Italy)142.30

IPSE 2000 (Italy)239.92

Mobipay España213.36

Lycos Europe 32.10

Hispasat 13.23

Portugal Telecom39.86

China Unicom Limited (Hong Kong. China) 5.38

ZON Multimedia45.40

BBVA 0.97

Amper 6.10

1 Telefónica holds an indirect participation of the ordinaryshare capital (with voting rights) of Telecom Italiathrough Telco of 10.36%. If we take into account thesaving shares (azioni di risparmio), which do not havevoting rights, the indirect participation of Telefónica overTelecom Italia would be 7.15%.

2 Ownership directly or indirectly held by TelefónicaMóviles España.

3 Telefónica's Group effective participation. TelefónicaGroup participation would be 10% if we exclude theminority interests.

4 Telefónica's Group effective participation. TelefónicaGroup participation would be 5.46% if we exclude theminority interests.

Telefónica Europe% Part

Telefónica O2 United Kingdom 100.00

Telefónica O2 Germany1100.00

Telefónica O2 Ireland 100.00

Manx 100.00

Be 100.00

Group 3G (Germany)2100.00

Telefónica O2 Czech Republic169.41

Telefónica O2 Slovakia3100.00

1 Company owned through Telefónica S.A.2 Company owned through Telefónica O2 Germany.3 Company owned through Telefónica O2 Czech Republic.

• The Board of Directors of TELEFÓNICA,S.A., at its meeting held on January 28th,2009, has analyzed and approved aproposal to increase the dividendcorresponding to 2009 fiscal year to a total amount of euro 1.15 per share. The appropriate corporate resolutions for that purpose will be passed at therelevant time.

• On September 17th, 2008, Telefónicaannounced its intention to launch aTender Offer through its wholly-ownedsubsidiary Inversiones TelefónicaInternacional Holding Ltda., to acquire allof the outstanding shares of Companíade Telecomunicaciones de Chile S.A (‘CTC’)that TELEFÓNICA did not control direct orindirectly, which amounted to 55.1% ofCTC’s share capital.

The offer was addressed to all CTC shareslisted on Santiago de Chile and New YorkStock Exchanges (represented byAmerican Depositary Shares), and wasstructured as a purchase of shares incash, at a price of 1,000 Chilean Pesos for class A shares and 900 Chilean Pesos for class B. On October 11th, 2008the offer price was increased to 1,100Chilean Pesos for class A shares and 990 Chilean Pesos for class B.

Upon completion of the acceptanceperiod of the tender offer, a total of496,341,699 shares issued by CTC weretendered, representing 94.11% of theshares to which the offer related whichrepresented a total investment ofapproximately 640 million euros. Aftersettlement of the transaction, Telefónica’sindirect ownership in CTC’s share capitalincrease from 44.9% to 96.75%.

Subsequently, pursuant to Chilean law, on December 1, 2008 Telefónica, through subsidiary Inversiones TelefónicaInternacional Holding, Ltda., presented a second tender offer (second offer) toacquire all the outstanding shares ofCompañía de Telecomunicaciones deChile, S.A. (CTC) it did not already hold,directly or indirectly, (representing 3.25%of CTC’s capital), in the same economicterms of the initial offer. The secondtender offer was completed on January 9,2009. Upon completion of the secondoffer, Telefónica's indirect stake in CTCincreased to 97.89%.

AddendaSignificant Events


The following changes took place in the consolidation perimeter in 2008:

Telefónica Latinoamérica

• On September 17th, 2008, Telefónicaannounced its intention to launch aTender Offer through its wholly-ownedsubsidiary Inversiones TelefónicaInternacional Holding Ltda., to acquire allof the outstanding shares of Companíade Telecomunicaciones de Chile S.A (‘CTC’)that TELEFÓNICA did not control direct orindirectly, which amounted to 55.1% ofCTC’s share capital.

After settlement of the transactionTelefónica’s indirect ownership in CTC’sshare capital increased from 44.9% to96.75%. This is the participation recordedin the consolidated financial statements.The Chilean company continues to beconsolidated in Telefónica Group by the full method.

For more information about thistransaction please refer to the Addenda: ‘Significant Events’.

• On April 3, 2008, in accordance with theterms of a sale and purchase agreemententered into on August 2, 2007, after thepertinent administration authorizationswere obtained, Vivo Participaçoes, S.A.(‘VIVO’) completed the acquisition of53.90% of the voting stock (ON) and4.27% of the preferred stock (PN) ofTelemig Celular Participaçoes, S.A., thecontrolling shareholder of TelemigCelular, S.A., a mobile telephony operatorin the State of Minas Gerais (Brazil).According to the terms of the sale and purchase agreement, the totalpurchase price was 1,163 million reais

(approximately 429 million euros). VIVOalso acquired the right held by the seller,Telpart Participaçoes, S.A. (‘TELPART’) tosubscribe in the future for paid up sharesin Telemig Celular Participaçoes S.A. for aprice of approximately 70 million reais(26 million euros).

In addition, on April 8, 2008, VIVO,through its subsidiary Tele Centro OesteIP, S.A., launched a voluntary tender offerfor shares representing up to one third of the free float of represented by thepreferred stock in Telemig CelularParticipaçoes, S.A. and in its subsidiaryTelemig Celular, S.A. at a price of 63.90and 654.72 Brazilian reais, respectively.Take-up of the offer, which concluded onMay 15, 2008, was satisfactory, reaching a level of acceptance of close to 100%,which implied the acquisition by TCO IP,S.A. of 31.9% and 6% of the preferredshares of Telemig Celular Participaçoes,S.A. and Telemig Celular, S.A., respectively.Furthermore, in accordance with BrazilianCorporations law, TCO IP, S.A. submitted amandatory tender offer on July 15, 2008,for all the voting stock in Telemig CelularParticipaçoes, S.A. and Telemig Celular, S.A.at a price per share equivalent to 80% ofthe purchase price of the voting stock ofthese companies.

On December 19, 2008, approval was given by shareholders of Telemig CelularParticipaçoes, S.A., Telemig Celular, S.A. and Vivo Participaçoes, S.A. (Vivo) in theirrespective extraordinary meetings toreorganize the Vivo Group, with TCO IP,S.A. spinning off its assets to merge withTelemig Celular, S.A. and Telemig CelularParticipaçoes, S.A., thereby making VIVO a shareholder in both companies, withdirect and indirect stakes at December 31,2008 amounting to 90.65% and 58.9%,

respectively. Both companies are included in the Telefónica Group’sconsolidation perimeter usingproportionate consolidation.

AddendaChanges to the Perimeter and Accounting Criteria of Consolidation


Other companies

• In December, Portuguese companyPortugal Telecom, S.G.P.S., S.A. (PT) boughtback and cancelled 46,082,677 shares inline with its share buyback program. Thisraised the Telefónica Group’s direct andindirect ownership interest to 10.48%. In accordance with article 20 of thePortuguese stock market code, Telefónicasold 4,264,394 shares of PT, therebylowering its stake to 10%. This company is still included in the consolidationperimeter using the equity method.

• In March 2008, Telco S.p.A., in whichTelefónica holds a stake of 42.3%,acquired 121.5 million shares at a price of 1.23 euros per share in the Italiancompany Telecom Italia (equivalent to0.9% of its share capital), bringing itstotal direct interest to 24.5% of the voting rights and 16.9% of the dividendrights. The transaction implied a payment of 149.8 million euros.

As a result, the Telefónica Group indirectlyholds 10.4% of Telecom Italia’s votingrights and 7.1% of its dividend rights.Telco, S.p.A. is included in the TelefónicaGroup's consolidated financialstatements by the equity method.

AnexosChanges to the Perimeter and Accounting Criteria of Consolidation


This document contains statements thatconstitute forward looking statementsabout the Company including financialprojections and estimates and theirunderlying assumptions, statementsregarding plans, objectives andexpectations. These statements appear in a number of places in this document and include statements regarding theintent, belief or current expectations of thecustomer base, estimates regarding futuregrowth in the different business lines andthe global business, market share, financialresults and other aspects of the activity and situation relating to the Company. The forward-looking statements in thisdocument can be identified, in someinstances, by the use of words such as‘expects’, ‘anticipates’, ‘intends’, ‘believes’,and similar language or the negativethereof or by forward-looking nature ofdiscussions of strategy, plans or intentions.

Such forward-looking statements are notguarantees of future performance andinvolve risks and uncertainties, and otherimportant factors that could cause actualdevelopments or results to differ materiallyfrom those expressed in our forward lookingstatements. These risks and uncertaintiesinclude those discussed or identified in the documents filed in the past -or in future reports- by Telefónica with therelevant Securities Markets Regulators, and in particular, with the Spanish Market Regulator.

Analysts and investors are cautioned not to place undue reliance on those forwardlooking statements, which speak only as of the date of this presentation. Except as required by applicable law, Telefónicaundertakes no obligation to release publicly the results of any revisions to

these forward looking statements whichmay be made to reflect events andcircumstances after the date of thispresentation, including, without limitation,changes in Telefónica’s business oracquisition strategy or to reflect theoccurrence of unanticipated events.

Neither this presentation nor any of theinformation contained herein constitutes an offer of purchase, sale or exchange, nor a request for an offer of purchase, sale or exchange of securities, or any advice or recommendation with respect to such securities.

Finally, analysts and investors are cautionedto consider that this financial information is un-audited and that this document maycontain summarized information. In thissense, this information is subject to, andmust be read in conjunction with, all otherpublicly available information, including if itis necessary, any fuller disclosure documentpublished by Telefónica.

For additional information, please contact.Distrito CRonda de la Comunicación s/n28050 Madrid (Spain)

Phone number:+34 91 482 87 00

Fax:+34 91 482 85 99

Email address:María García-Legaz([email protected])Dolores García ([email protected])Isabel Beltrán ([email protected])[email protected]/shareholdersandinvestors

Disclaimer


Management of risks

Financial instruments and risk managment policy

The Telefónica Group is exposed to variousfinancial market risks as a result of (i) itsordinary business activity, (ii) debt taken on to finance its business, (iii) investmentsin companies, and (iv) other financialinstruments related to the abovecommitments.

The main market risks affecting the Group are as follows:

1. Exchange rate riskExchange rate risks arise mainly from two sources. The first is Telefónica'sinternational presence, through itsinvestments and businesses in countriesthat use currencies other than the euro(these are largely in Latin America, butalso in the Czech Republic and the UK).The second is debt denominated incurrencies other than the one that it isplaced on the country where the businessis conducted or the home country of thecompany taking on the debt.

2. Interest rate riskThis arises from changes in (i) financialexpenses on floating rate debt (or short-term debt likely to be renewed), due to changes in interest rates and (ii) the value of long-term liabilities at fixed interest rates.

3. Share price riskThis arises from changes in the value ofequity investments that may be bought,sold or otherwise involved in transactions,from changes in the value of derivativesassociated with such investments, fromtreasury shares and from equity derivatives.

The Group is also exposed to liquidity risk if a mismatch arises between its financingneeds (operating and financial expense,investment, debt redemptions and dividendcommitments) and its sources of finance(revenues, divestments, credit lines fromfinancial institutions and capital marketoperations). The cost of finance could also be affected by movements in the credit spreads (over benchmark rates)demanded by lenders.

Finally, there is the so-called ‘country risk’(which overlaps with market and liquidityrisks). This refers to the possible decline in assets, cash flows generated or cashflows returned to the parent company as a result of political, economic or socialinstability in the countries where theTelefónica Group operates, especially in Latin America.

The Telefónica Group actively managesthese risks with a view to reducing changesin cash flows and the income statement, or offsetting them with opposite changes in debt. In this way, it attempts to protectthe Group's solvency, facilitate financialplanning and take advantage of investment opportunities.

Telefónica uses derivatives to manage risks, basically on exchange rates, interestrates and shares.

Exchange rate riskThe fundamental objective of the exchangerate risk management policy is to offset (at least partly) potential losses of cashflows caused by declines in exchange ratesvis-à-vis the euro, with savings on the lowereuro value of foreign-denominated debt(from currency depreciation). The degree of hedging varies depending on the type of investment.

At December 31, 2008, net debt in LatinAmerican currencies was nearly 5,827 millioneuros. However, this debt is not distributed in proportion to the cash flows generated in each country. Its future effectiveness as a hedge of exchange rate risks thereforedepends on which currencies depreciate.

The Company further protects itself againstdeclines in Latin American exchange ratesaffecting its assets through the use ofdollar-denominated debt, either in Spain(where such debt is associated with theinvestment as long as it is considered to be an effective hedge) and in the countryitself, where the market for local currencyfinancing or hedges may be inadequate ornon-existent. At December 31st, 2008, theGroup's net dollar-denominated debtamounts to the equivalent of 2,222 millioneuros, net of the effect of the derivativecontracts and financial assets in dollars, of which 1,317 million euros are related toassets in Latin America and the rest (906million euros) are hedges of the Group'sinvestment in China Unicom.

To protect its investment in the CzechRepublic, the Group has net debtdenominated in czech crowns, which atDecember 31st, 2008 amounted to 3,034million euros, nearly 75% of the original cost of the investment.

Debt in pounds sterling stands close to 2times the OIBDA of the Telefónica Europebusiness unit in the UK. The aim is tomaintain the same proportion as theGroup's net debt/OIBDA ratio, therebyhelping to reduce its sensitivity to changesin the pound sterling/euro exchange rate.Pound sterling-denominated debt atDecember 31st, 2008 was equivalent to 3,855 million euros, far below the 6,667million euros at year-end 2007, partly due

Management of risks


to the pound's 30% depreciation in 2008and partly to pounds sterling generated by the business.

The Group also manages exchange rate riskby seeking to minimize the negative impactof any remaining exchange rate exposureon the income statement, regardless ofwhether it has open positions. Suchexposure can arise for any of three reasons:(i) a thin market for local derivatives ordifficulty in obtaining financing in localcurrency which does not allow for a low-cost hedge to be arranged (as in Argentinaand Venezuela), (ii) financing through intra-group loans, where the accountingtreatment of exchange rate risk is differentfrom that for financing through capitalcontributions, (iii) as the result of adeliberate policy decision to avoid the highcost of hedges that are not warranted byexpectations or high risk of depreciation.

In 2008, exchange rate managementresulted in gains totally 23.7 million euros.

If the exchange rate position affecting theincome statement at the end of 2008 were constant in 2009 and Latin Americancurrencies depreciated against the US dollarand the rest of the currencies against theeuro by 10%, the impact on the incomestatement would be a negative 107 millioneuros. Nonetheless, the Group dynamicallymanages its exposure to such changes tomitigate their impact.

As management's objective is not anaccounting indicator, no sensitivity analysisis performed regarding potential impact of exchange rate changes on translationdifferences (equity).

Interest rate riskTelefónica's financial expenses are exposedto changes in interest rates. In 2008, therates applied to the largest volumes ofshort-term debt were mainly based on the Euribor, the Czech crown Pribor, theBrazilian SELIC, the dollar Libor and theColombian UVR in nominal terms. AtDecember 31st, 2008, 43.8% of the net debt(or 46.3% of net long-term debt) was at rates fixed for more than one year,compared to 50.4% of net debt (46.3% of long-term net debt) in 2007. Of theremaining 56.2% (net debt at floating or

fixed rates maturing in less than one year),the interest rate on 28 percentage pointswas set for a period of more than one year(17% of long-term net debt), compared to 46 percentage points on debt at floating or fixed rates maturing in less than one year(27% of long-term debt) at December 31st, 2007.This is due to the cancellation and maturity(without renewal) of an amount equivalent to3,422 million euros of Caps and Floors in 2008in euros, US dollars and pounds sterling inanticipation of a fall in interest rates.

In addition, in discounting early retirementliabilities the fall in interest rates led to anincrease in the amount of these liabilities.However, this increase was nearlycompletely offset by the increase in thevalue of the hedges on these positions.

The net financial expense in 2008 totaled2,797 million euros, slightly (1.6%) below the prior year figure (2,844 million euros).Excluding exchange rate differences, netinterest expense in 2008 and 2007 was2,821 million euros and 2,851 million euros,respectively, implying a slight 1.1% decreasein adjusted finance costs in 2008 comparedto 2007. This decrease is the result of two offsetting factors: 1) a 7.6% decline inaverage net debt in 2008 (3,868 millioneuros), which led to a saving of 240 millioneuros; and 2) an increase in finance costs of 165 million euros as a result of a 31 basispoints increase in the average cost of debt,mostly because: (i) average net debt in 2008was at higher rates than the average for 2007due to the higher relative weight of LatinAmerican debt and the hikes in rates in euros,pounds sterling, czech crowns and US dollarsversus 2007, and (ii) a 44 million euro decreasein non-recurring income related to positionsmeasured at fair value. The figure for financialexpenses in 2008 implies an average cost ofaverage total net debt of 5.95%, or 6.00%stripping out exchange rate gains.

To illustrate the sensitivity of finance coststo variability in short-term interest rates,assuming a 100 basis point rise in allcurrencies in which there are financialpositions and no change in the currencymake-up and balance of the position at yearend, the finance cost at December 31st, 2008would increase by 178 million euros.

Share price riskThe Telefónica Group is exposed to changes in the value of equity investmentsthat may be bought, sold or otherwiseinvolved in transactions, from changes inthe value of derivatives associated withsuch investments, from treasury shares and from equity derivatives.

The Telefónica Group has core, long-termdirect and indirect holdings in companiesexposed to the risk of changes in their shareprice, such as PT Multimedia, S.G.P.S., S.A. (Zon),China Unicom Hong Kong, Ltd and BancoBilbao Vizcaya Argentaria (BBVA) (see Note 9).

As part of its shareholder remuneration policy,in February 2008, Telefónica announced aplan to buy back up to 100 million shares,representing approximately 2.095% of itsshare capital at that time. In October 2008,Telefónica announced the extension of thisprogram by 50%, or another 50 million shares.Telefónica Group manages the share price riskof the share buyback programs by setting thetimetable for execution in accordance withthe pace of cash flow generation, the shareprice and other market conditions, whilecomplying with applicable legal, regulatoryand bylaw limits.

At the Shareholders' Meeting of Telefónica,S.A. on June 21, 2006, shareholders approvedthe introduction of a long-term incentiveplan for Managers and Senior Executives of Telefónica, S.A. and other TelefónicaGroup companies (the ‘PSP’). Under thisplan, selected participants who met thequalifying requirements were given therights to earn a certain number ofTelefónica, S.A. shares as a form of variableremuneration (see Note 20.a).

According to the plan, the shares may beeither (a) treasury shares in Telefónica, S.A.,acquired by either Telefónica, S.A. itself orany of the Telefónica Group companies, incompliance with the legal requirements inforce in this connection; or (b) newly-issuedshares. The possibility of delivering shares to employees in the future, in accordancewith relative shareholder remuneration orprofit, implies a risk since there could be anobligation to hand over a maximum numberof shares at the end of each cycle, whose


Note: Notes are included in the Telefónica S.A. 2008 Financial Report.

acquisition (in the event of acquisition in themarket) in the future could imply a highercash outflow than required on the start dateof each cycle if the share price is above thecorresponding price on the cycle start date. In the event that new shares are issued fordelivery to the beneficiaries of the plan, therewould be a dilutive effect for the ordinaryshareholder as a result of the higher numberof shares outstanding.

To reduce this risk and ensure that enoughshares are available, the Telefónica Grouphas acquired derivatives that replicate therisk profile of the shares (see Note 20).In addition, part of the treasury sharesacquired at the end of the year could beearmarked to cover the plan. At December31st, 2008, the Group held 125,561,011 shares of Telefónica, S.A. (see Note 12). Theliquidation value of the treasury sharescould increase or decrease depending onvariations in the Telefónica share price.

Liquidity riskTelefónica seeks to match the schedule for its debt maturity payments to itscapacity to generate cash flows to meet these maturities, allowing someflexibility. In practice, this means monitoring two key criteria:

1. Group debt must have a longer averagematurity than the time it will take toearn the cash to pay it (assuming internalprojections are met, and all cash flowsgenerated go to pay down debt ratherthan on dividends or acquisitions).

2. The Group must be able to pay allcommitments over the next 12 monthswithout accessing new borrowing or tapping the capital markets (although including firm credit linesarranged with banks), assuming budget projections are met.

As of December 31st, 2008, the averagematurity of the Group's (42,733 million euros) net financial debt was 5.9 years. The Group would need to generate around7,243 million euros per year to repay the debt in this period if it used all its cash for this purpose. Cash generation in 2008amply exceeded this amount, so that if it

maintains the same pace of cash generation during the average lifetime of the debt, the Group would repay the debt in its entirety before 4.67 years if it used all its cash for this purpose.

Gross debt maturities in 2009, ofapproximately 7,014 million euros (includingthe net position of derivative financialinstruments), are lower than the amount of funds available, calculated as the sum of:a) current financial investments and cash atDecember 31st, 2008 (5,408 million eurosexcluding derivative financial instruments),b) annual cash generation projected for2009; and c) undrawn credit facilitiesarranged with banks whose originalmaturity is over one year (more than 3,800million euros at December 31st, 2008). Thisgives the Telefónica Group flexibility withregard to tapping capital or credit markets in the next 12 months.

The principal financing transaction in 2008(to ensure compliance with the managementcriteria indicated above) consisted of an issueof 1,250 million euros worth of five-year bondswith an annual coupon of 5.58% (equivalentto 94 basis points above the benchmark ‘5-year Mid-swap rate’). See Note 24 ‘Eventsafter the balance sheet date’ for a descriptionof other financial transactions carried out aspart of these measures after the end of 2008.

In 2008, the Group reduced its nets financialdebt by 2,551 million euros to 42,733 millioneuros, extending the trend of the previoustwo years (45,284 and 52,145 million euros at December 31, 2007 and 2006, respectively)(see Note ‘Key performance indicators’).Meanwhile, at December 31st, 2008, theTelefónica Group had total unused creditfacilities from various sources amounting toover 7,400 million euros (9,250 million eurosat December 31st, 2007 and 8,000 millioneuros at December 31st, 2006).

Country riskTelefónica has managed or mitigatedcountry risk by pursuing two lines of action (in addition to its normal businesspractices):

1. Partly matching assets to liabilities (thosenot guaranteed by the parent company)

in its Latin American companies such thatany potential asset impairment would beaccompanied by a reduction in liabilities,

2. Repatriating funds generated in LatinAmerica that are not required for thepursuit of new, profitable businessdevelopment opportunities in the region.

Regarding this first point, Telefónica's LatinAmerican companies now have external net debt not guaranteed by the Spanishcompanies of 4,075 million euros, i.e. 9.5% of the Group's total net financial debt, withColombia (2,946 million euros), Brazil (1,276million euros) and Peru (910 million euros),accounting for the bulk of the total.

Regarding the repatriation of funds, 1,839 million euros was received from LatinAmerica in 2008, of which 1,115 million euroswas from dividends and 724 million eurosfrom inter-group loans (repayment ofprincipal and payment of interest) andcapital decreases. Meanwhile, funds weresent to Latin American, mainly Colombia (155 million euros) in connection with theTelefónica Móviles Colombia's capitalincrease, and Chile (664 million euros) for the buyout of CTC's minorities (see Note 21.b). Net funds repatriated from Latin America amount to the equivalent of 899 million euros.

In this regard, it is worth noting that sinceFebruary 2003, Venezuela has had anexchange control mechanism in place. The Currency Administration Commission(CADIVI) was set up to manage the exchangecontrol system and determine authorizationsof currency sales. This body has issued anumber of regulations (‘providencias’)governing the modalities of currency sales in Venezuela at official exchange rates.Foreign companies which are duly registeredas foreign investors are entitled to requestapproval to acquire currencies at the officialexchange rate by the CADIVI, in line withregulation number 029, article 2, section c)‘Remittance of earnings, profits, income,interest and dividends from internationalinvestment.’ Telcel, the Group's subsidiary inVenezuela, obtained approval on 137 millionUS dollars under this heading in 2006, 240million US dollars in 2007 and 365 million USdollars in 2008. The final dividend to be paidout of 2006 profit of 536 million US dollars

Management of risks



proposed recently is pending approval. Once this is approved, the Group will seekauthorization to pay the dividends related to 2007 profit. Accordingly, the Group willhave to continue obtaining the necessaryauthorizations in future for requestssubmitted to the CADIVI. It expects this to occur with the same diligence andfrequency as in the past, enabling it tocontinue carrying out its businesses inVenezuela as normal and to repatriate funds from this country.

Credit riskThe Telefónica Group trades in derivativeswith creditworthy counterparties. Therefore,Telefónica, S.A. trades with credit entitieswith senior debt ratings of at least ‘A.’ InSpain, where most of the Group's derivativesportfolio is, there are netting agreementswith financial institutions, with debtor or creditor positions offset in case ofbankruptcy, limiting the risk to the netposition. For other subsidiaries, particularlythose in Latin America, given the stablesovereign rating provides a ceiling and isbelow ‘A,’ trades are with local financialentities whose rating by local standards isconsidered to be of High Creditworthiness.

The Telefónica Group considers managingcommercial credit risk as crucial to meetingits business and customer base growthtargets in a manner that is consistent with its risk-management policy.

Therefore, the Group's commercial credit risk-management approach is based oncontinuous monitoring of the risk assumedand the resources necessary to manage theGroup's various units, in order to optimizethe risk-reward relationship in thedevelopment and execution of their businessplans in their ordinary management.

For this, uniform policies, procedures,authorization lines and management practicesare established for all Group companiesbearing in mind the individual needs andinternational best practice in this area, andincluding the commercial credit-riskmanagement model in the Group's decision-making process, at both the strategic andthe day-to-day operations level.

Meanwhile, with credit risk arising from cashand cash equivalents, the Telefónica Groupplaces its cash surpluses in high quality andhighly liquid money-market assets. Theseplacements are regulated by a GeneralFramework, revised annually based onconditions of the market and countries wherethe Group operates. The General Frameworksets: (i) the maximum amounts to be investedby counterparty based on its rating (long-term debt rating); (ii) the maximum period of the investment; and (iii) the instrumentsin which the surpluses may be invested. For Telefónica, S.A., the Company which places the bulk of the Group's surpluses, the maximum placement in 2008 was 180 days and the creditworthiness of thecounterparties used, measured by their debt ratings, remained above A- and/or A3 by S&P and Moody's, respectively.

The Group's maximum exposure to creditrisk is initially represented by the carryingamounts of the financial assets (Notes 11 and13) and the guarantees given by the Group.

Capital managementTelefónica's finance department, which is in charge of the Group's capitalmanagement, takes into considerationseveral factors when determining theCompany's capital structure.

The first is the consideration of cost ofcapital at all times to achieve a combinationthat optimizes this. For this, the companymonitors the financial markets and updatesto standard industry approaches forcalculating cost of capital (WACC, weightedaverage cost of capital) in determining thisvariable. The second, a gearing ratio thatenables the Company to obtain andmaintain the desired credit rating over the medium term, and through whichTelefónica can match its potential cash flow generation and the alternative uses of this cash flow at all times.

These general arguments are rounded off with other considerations and specifics,such as country risk in the broadest sense,tax efficiency and volatility in cash flowgeneration, when determining the Group'sfinancial structure.

Derivatives policyAt December 31st, 2008, the nominal value of outstanding derivatives with externalcounterparties came to 141,984 millioneuros. This amount is just 8.6 % higher thanin 2007 (130,715 million equivalent euros).This figure is inflated by the use in somecases of several levels of derivatives appliedto the nominal value of a single underlyingliability. For instance, a foreign currency loancan be hedged into floating rate, and theneach interest rate period can be fixed usinga forward rate agreement. Even using suchtechniques to reduce the position, it is stillnecessary to take extreme care in the use of derivatives to avoid problems arisingthrough error or a failure to understand thereal position and its associated risks.

The Group's derivatives policy emphasizesthe following points:

1) Derivatives based on a clearly identified underlying.Acceptable underlyings include profits,revenues and cash flows in either a company'sfunctional currency or another differentcurrency. These flows can be contractual (debtand interest payments, settlement of foreigncurrency payables, etc.), reasonably certain orforeseeable (investment program, future debtissues, commercial paper programs, etc.). Theacceptability of an underlying asset in theabove cases does not depend on whether itcomplies with IFRS requirements for hedgeaccounting, as is required in the case of certainintra-group transactions, for instance. Parentcompany investments in subsidiaries withfunctional currencies other than the euro also qualify as acceptable underlying assets.

Economic hedges, i.e. hedges with adesignated underlying asset and which incertain circumstances offset fluctuations inthe underlying asset value, do not alwaysmeet the requirements and effectiveness tests laid down by accounting standards for treatment as hedges. The decision to maintain positions that cease to qualify as effective or fail to meet otherrequirements will depend on the marginalimpact on the income statement and how far this might compromise the goal of a stable income statement. In any event, the variations are recognized in the income statement.



2) Matching of the underlying to one side of the derivative.This matching basically applies to foreigncurrency debt and derivatives hedgingforeign currency payments by Groupsubsidiaries. The aim is to eliminate the riskarising from changes in foreign currencyinterest rates. Nonetheless, even when theaim is to achieve perfect hedging for all cashflows, the lack of breadth to certain markets,especially in Latin American currencies, hasmeant that historically there have beenmismatches between the terms of thehedges and those of the debts they aremeant to hedge. The Telefónica Groupintends to reduce these mismatches,provided that doing so does not involvedisproportionate costs. In this regard, if adjustment does prove too costly, the financial timing of the underlying asset in foreign currency will be modified in order to minimize interest rate risk in foreign currency.

Sometimes, the timing of the underlying as defined for derivative purposes may not be exactly the same as the timing of thecontractual underlying.

3) Matching the company contracting the derivative and the company that owns the underlying.Generally, Telefónica aims to ensure thatthe hedging derivative and the hedgedasset or liability belong to the samecompany. Sometimes, however, the holdingcompanies (Telefónica, S.A. and TelefónicaInternacional, S.A.) have arranged hedgeson behalf of a subsidiary that owns theunderlying asset. The main reasons forseparating the hedge and the underlyingasset were possible differences in the legalvalidity of local and international hedges(as a result of unforeseen legal changes)and the different credit ratings of the counterparties (whether Groupcompanies or the banks).

4) Ability to measure the derivative's fair value using the valuation systemsavailable to the Group.Telefónica uses a number of tools tomeasure and manage risks in derivativesand debt. The main ones are Kondor+,licensed by Reuters, which is widely used by financial institutions, and MBRMspecialist financial calculator libraries.

5) Sale of options only when there is an underlying exposure.Options can only be sold when: i) there is anunderlying exposure (on the balance sheet or associated with a highly probable cashoutflow) that would offset the potential lossfor the year if the counterparty exercised theoption, or ii) the option is part of a structurein which another derivative offsets any loss.The sale of options is also permitted in option structures where, at the moment they are taken out, the net premium is either positive or zero.

For instance, it would be possible to sellshort-term options on interest rate swapsthat entitle the counterparty to receive acertain fixed interest rate, below the levelprevailing at the time the option was sold.This would mean that if rates fell and thecounterparty exercised its option, Telefónicawould swap part of its debt from floatingrate to a lower fixed rate, having received a premium.

6) Hedge accountingThe main risks that may qualify for hedge accounting are as follows:

• Variations in market interest rates (either money-market rates, creditspreads or both) that affect the value ofthe underlying asset or the measurement of the cash flows.

• Variations in exchange rates that changethe value of the underlying asset in thecompany's functional currency and affectthe measurement of the cash flow in thefunctional currency.

• Variations in the volatility of any financialvariable, asset or liability that affecteither the valuation or the measurementof cash flows on debt or investmentswith embedded options, whether or not these options are separable.

• Variations in the valuation of anyfinancial asset, particularly shares of companies included in the portfolio of ‘Available-for-sale financial assets’.

Regarding the underlying:

• Hedges can cover all or part of the value of the underlying.

• The risk to be hedged can be for thewhole period of the transaction or for only part of the period.

• The underlying may be a highly probablefuture transaction, or a contractualunderlying (loan, foreign currencypayment, investment, financial asset, etc.)or a combination of both that defines anunderlying with a longer term.

This may on occasion mean that thehedging instruments have longer termsthan the related contractual underlying.This happens when Telefónica enters intolong-term swaps, caps or collars to protectitself against interest rate rises that mayraise the financial expense of itspromissory notes, commercial paper andsome floating rate loans which matureearlier than their hedges. These floatingrate financing programs are highly likely to be renewed and the Company commitsto this by defining the underlying asset ina more general way as a floating ratefinancing program whose term coincideswith the maturity of the hedge.

Hedges can be of three types:

• Fair value hedges.

• Cash flow hedges, which can be set at any value of the risk to be hedged(interest rates, exchange rates, etc.) or for a defined range (interest ratesbetween 2% and 4%, above 4%, etc.). In this last case, the hedging instrumentused is options and only the intrinsicvalue of the option is recognized as aneffective hedge. Changes in the timevalue of the option are taken to theincome statement. To prevent excessiveswings in the income statement fromchanges in time value, the hedging ratio(amount of options for hedging relativeto the amount of options not treated as hedged) is assigned dynamically, as permitted by the standard.

• Hedges of net investment in consolidatedforeign subsidiaries. Generally suchhedges will be arranged by Telefónica, S.A.and the other Group holding companies.Wherever possible, these hedges areimplemented through real debt in foreigncurrency. Often, however, this is not

Management of risks


always possible as many Latin Americancurrencies are non-convertible, making itimpossible for non-resident companies toissue local currency debt. It may also bethat the debt market in the currencyconcerned is too thin to accommodatethe required hedge (czech crown, poundsterling), or that an acquisition is made incash with no need for market finance. Inthese circumstances derivatives, eitherforwards or cross-currency swaps areused to hedge the net investment.

Hedges can comprise a combination of different derivatives.

There is no reason to supposemanagement of accounting hedges willbe static, with an unchanging hedgingrelationship lasting through maturity. Infact, hedging relationships may change to allow appropriate management thatserves the stated principles of stabilizingcash flows, stabilizing net financialincome/expense and protecting the sharecapital. The designation of hedges maytherefore be cancelled, before maturity,because of a change in the underlying, achange in perceived risk on the underlyingor a change in the market's view.Derivatives included in these hedges maybe reassigned to new hedges where theymeet the effectiveness test and the newhedge is well documented. To gauge theefficiency of transactions defined asaccounting hedges, the Company analyzesthe extent to which the changes in thefair value or in the cash flows attributableto the hedged item would offset thechanges in fair value or cash flowsattributable to the hedged risk using a linear regression model.

The main guiding principles for riskmanagement are determined by theTelefónica Group's Corporate FinanceDepartment and implemented by companyCFOs (responsible for balancing theinterests of each company and those of theGroup). The Corporate Finance Departmentmay allow exceptions to this policy wherethis can be justified, normally when themarket is too thin for the volume oftransactions required or on clearly limitedand small risks. New companies joining the Group as a result of mergers oracquisitions may also need time to adapt.


1945The Spanish State nationalises79.6% of all CTNE shares, ownedby ITT.

1960CTNE is already the country'sleading firm, with 100,000shareholders, a share capital of 10,412 million pesetas and a workforce numbering 32,000.

1967Satellite communicationscommence. Telefónicainaugurates thecommunications earth stationat Buitrago de Lozoya.

Telefónica was created in 1924 in Spain, with a stake held by a North-American multinational (ITT). 85 years on, the Company has surpassed other companies that werereferences in their time: it is the world's largest integrated operator in terms of customer access numbers (259 million), operates in 25 countries, has a workforce of over 257,000employees and has maintained its identity as the most important Spanish multinational under the Telefónica trademark.

Telefónica, which closed 2008 with a market capitalisation of 74,574 million euros, maintaining its fourth position worldwide amongst other companies in the sector, is also a driving force for progress in those countries where it is present.

The largest integrated operator in the world

Telefónica: 85 years history of continual progress

History


1974The CTNE turns 50. The rise indemand for data transmissioncircuits would spur thedevelopment of the TESYSsystem a few years later.

1985The Company receives a new image and is renamed:Telefónica de España, S.A.

1987Telefónica is quoted for the firsttime on the New York StockExchange.

1988The Communications PlanningLaw (LOT) comes into force.

1993Commercial launch of the firstSpanish satellite Hispasat;Telefónica, already present in sixAmerican countries, takes thedecisive step of participating intrans-European networks.

1994Digital mobile telephony is launched.

1995First partial privatisation of Telefónica.


History


1998A consortium headed byTelefónica is awarded thetender for Telesp, whichoperates in the state of São Paolo.

Telefónica unveils its new corporate image.

1999Broadband becomes availableemploying ADSL technology.

Telefónica is completelyprivatised and is reorganised asa holding in order to be able tomanage business interests onglobal scale.

2002Telefónica starts disinvesting in communication companies. It merges its platform with TV Digital.

2003Telefónica and Portugal Telecomestablish a joint companybringing together all their mobilecommunications assets in Brazil.

2004Acquisition of BellSouth's mobile communications assets in Latin America.

2005Acquisition of Cesky Telecom.


2007Telefónica O2 Slovakia begins operating.

Telefónica and China Netcom broaden their strategic cooperation

2008259 million customer accesses

Telefónica launches Trío Futura,its first pre-commercial opticalfibre service.

Telefónica, an important private partner in the new China Unicom.

Telefónica launches keteke.com,the first multi-platform socialnetwork open to users of all mobile operators.

Unanimous backing ofshareholders for the Company'spublic takeover bid for theChilean subsidiary CTC.

Telefónica ends 2008 with anequity market capital of 74,574million euros, in fourth positionamongst companies in its sectorglobally.

2006Telefónica buys 51% of Colombia Telecom.

Telefónica acquires theEuropean assets of the mobile telephony operator O2 in the United Kingdom,Germany and Ireland.

It is awarded the mobilelicence in Slovakia.

Telefónica reorganises itsstructure to offer its customersan integrated managementmodel, creating threegeographical areas: Spain, LatinAmerica and Europe.

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First quarter

January February March

Telefónica del Perú is awarded two newbandwidths (450 and 900 MHz) allowing it to install over one million wireless lines for lower income sectors.

New music portal for Broadband customers in Argentina.

Telefónica increases its stake in China Netcom to 7.22%.

Telefónica, the only company in the ‘teleco’ sector of the S&P Global Pick 2008

The Broadband service provided by Telefónica O2 in the United Kingdom, one of the bestaccording to the British.

The Company reduces the digital divide in 80 popular districts in Chile.

Telefónica's intermediation service for people with acoustic disabilities in Argentina receives30,000 calls a month.

Telefónica R+D encourages the use ofvideoconferences to reduce CO2 emissions.

Telefónica's commitment to sustainabledevelopment, one of the main themes at the VII movilforum trade fair.

Fundación Telefónica receives first prize in the competition 'Chile Somos Todos' (Chile isEveryone) for its support of disabled people.

Thanks to its Volunteer programme, the Foundationjoins the Global Corporate Volunteer Council.

The telephone MOTO Q™ GSM is launched inEcuador, incorporating state-of-the-art mobilemultimedia features.

Agreement with Microsoft to offer its Windows Lifeservices to Movistar customers in 12 Latin Americancountries.

Telefónica and Samsung revolutionise the mobilephone by allowing the user to create his/her owncontent on line.

The new ultramobile PC HTC Shift gives a boost to mobile working methods.

Uruguay and Chile unveil the first 3G roamingservice in Latin America.

Markting of the iPhone™ in Ireland.

Telefónica Germany recognised as the number 1mobile operator in terms of global satisfaction.

Noted presence at the Mobile World Congress inBarcelona: pioneering agreement with Microsoft for music and deal with Samsung to market anUltra Mobile PC.

Telefónica climbs to second position in theEurostoxx 50.

Annual investment plan of 20 million euros toinvest in new innovative technology companies.

Historic results in 2007: net benefits of 8,906million euros, a 42% increase.

Telefónica announces a new buy-back plan for 100 million shares.

Movistar launches the first mobile-to-fixed flat-rate tariff that can be used anywhere in Spain.

The Campus Partyreaches America thanksto Telefónica.

The Ministry for Industry, Tourism and Commercesigns an agreement with Telefónica to promote the Information Society in Spain.

Telefónica announces its participation in the GSMA alliance designed to combat child pornography on the Internet.

Telefónica Europe launches websites dedicated to the protection of children and teenagers in all countries in which it operates.

The projects 'ICT serving the interests of eHealth' and EducaRed receive the AUTELSI 07 prize (Spanish Association of Users of Telecommunications and of the Information Society).

6,500 children start school in Guatemala thanks to Proniño.

Telefónica breaks new ground in Brazil by marketing 30 MB ADSL.

Colombia increases its Internet access capacity by 50%

Telefónica Latinoamérica launches Sigres, a system for improving management of services.

Telefónica leads testing for mobile phone TV using different standards.

Telefónica participates in Bolsalia, Madrid's main shareholders forum.

Between 2005 and 2007 Telefónica dedicates 21,500 million euros to growing businesses.

‘Telefónica Summit’: the Company directors commit to lead the sector's progress and theInformation Society.

The Mobile Internet kit is launched, allowing access to Mobile Internet without any minimumcontract or usage stipulations.

Telefónica calculates its Digital Footprint using the GHG Protocol, an internationally recognisedmethodology.

Fundación Telefónica, Virtual Educa and RELPE will develop an Ibero-American VirtualNetwork of Educational Centres to facilitate the educational integration of the offspring of Latin American immigrants.

EducaRed of Chile receives an award from AHCIET in recognition of its creativity, interactivity and contribution to education.

educared


Second quarter

April May June

Telefónica reinforces its strategic relationship with Microsoft in order to strengthen their jointcommercial offering all over the world.

Telefónica O2 Germany joins forces with Huawei to offer network coverageapproaching 100%.

Telefónica brings forwards its growth estimates forLatin America by one year and hopes to break thebarrier of 150 million accesses in 2008.

Vivo closes the purchase of Telemig mobile andconsolidates its leadership in Brazil.

Telefónica gains a new mobile concession inEcuador, which includes 3G services.

The fifth version of Play Pack comes out, a mobilephone for young people with services gearedtowards responsible use.

Agreement with the IDB to offer banking services to the less well off in Latin America.

Presentation in Brussels of the educational webTeach Today, sponsored by Telefónica and otherleading companies.

Telefónica leads the ethical index compiled by‘Economistas sin Fronteras’.

Telefonica Foundation accredited as a SociallyResponsible Business.

Telefónica México and Microsoft join forces toextend the on line educational network for teachers in Latin America.

Agreement between Fundación Telefónica and CEPAL to encourage the use of ICT to promotegrowth in Latin America and the Caribbean.

Telefónica concludes an agreement with Huawei, a leading provider of new generation networks fortelecommunications operators, to create a centrefor innovation in Spain.

Telefónica, recognised by the organisation InvestorRelations as the leading European teleoperator interms of relations with investors.

Telefónica receives the ‘Annual Golden Award 2008’from the Official Chamber of Commerce of Spain inGreat Britain for its commercial successes

Telefónica España launches Canguro Móvil, a new service that allows access via mobile phone to content not recommended for those underage to be restricted.

Telefónica facilitates access to mobile banking for 175 million lower income people.

Presentation of a pioneering study on disability in the Spanish and European health sectors.

Telefónica combines music and environment in the UN campaign 'Plant for the Planet'

Telefónica publishes itsAnnual Corporate SocialResponsibility Report 2007.

Telefónica donates one million euros to China to help alleviate the aftermath of the Sicuan earthquake.

The Company sponsors Internet Day and promotes activities designed to popularise the use of the Internet.

Company Response revolutionises fixed telephony in Spain with flat-rate Mobile Internet tariffs.

Telefónica launches an exclusive portal for its global customers in Latin America.

Telefónica makes one of the largest catalogues of independent music available to its customersfollowing an agreement with IODA in 24 countries.

Telefónica, the company included in the Ibex-35 with the best on line financial information,according to the Spanish Accounting and BusinessAdministration Association (AECA).

A new multimedia messaging service by Movistarunites Chileans and Argentineans.

Telefónica, one of the first companies to adhere tothe 'European Transparency Initiative', the registercreated by the European Commission to promotetransparency.

The Chairman of Telefónica, César Alierta,announces the creation of a Climate Change Officeat the Zaragoza Exhibition in order to reducegreenhouse gases.

Telefónica takes the Campus Party to Colombia.

Proniño, the Telefónica programme aimed ateradicating child labour in Latin America, bringstogether intellectuals and artists under the slogan'Juntos Podemos', (Together we can) and launchesthe 'Proniño Caravan' toheighten public awarenessof this problem.

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Third quarter

July August September

Telefónica begins to exclusively market the new iPhone™ 3G by Apple in Spain; and brings the handset out in Ireland.

Telefónica opens the most avant-garde telephony shop in theworld at its historic headquarters in Gran Vía, 28 (Madrid).

Launch of a global platform capable of placingadvertising on any sort of mobile support.

Telefónica provides its five million ADSL in Spain.

Telefónica, first company to market the first Asus NetBook a pioneering launch that popularised mini PC's.

Telefónica, the first Spanish company in the FTGlobal 500-2008, the ranking of the 500 largestcompanies in terms of market capitalization.

Telefónica reaches 245 million clients worldwide.

Movistar launches ‘SoluciónFamiliar’ (Family Solution), withtariffs and services designed forSpanish families.

Agreement with the CNSEFoundation (State Confederationof Deaf People) to set up a video interpretationplatform for deaf people.

Telefónica markets the Nokia 3110 Evolve, theworld's first ecological handset.

Ecuador, the best company in the country in termsof Corporate Social Responsibility.

Telefónica presents the report ‘ICT in LocalGovernment of the future.’

11th edition of the electronic art awards VIDA, which will lead to the creation of a Virtual Museum on the Internet.

Terra exclusively broadcasts the Olympic Games for all Latin America, obtaining audience figures of 22.7 million users.

Telefónica takes the iPhone™ to Latin America and the Czech Republic and adds up to 16 countries worldwide.

The Czech Republic quadruples the speed of its ADSL.

Telefónica Chile creates a convergent platform of communication services.

O2 continues to reduce prices for roaming services.

Telefónica launches Trio Futura, its first pre-commercial offer of fibre optic services.

Telefónica signs a cooperation agreement with the National Development Institute - INADE in Peru to improve coverage in rural areas.

'Intégrame', the digital inclusion programme inPeru, receives a prize in the 'International BusinessAwards' as one of the best telecommunicationproducts worldwide.

Collaboration in the 'Study on services in corporate ecosystems', which is presented during the congress of the International Union for Nature Preservation.

Telefónica Europe applies the global report modelin its Corporate Responsibility Reports 2007.

For the first time, the Volunteers of TelefónicaEurope participate in 'Solidarity Holidays' in order to collaborate with Proniño.

The Telefónica Arts Stand at the ZaragozaInternational Exhibition receives over half a million visitors.

The number of channels offeredby Cable Mágico, the Peruviantelevision, reaches 70.

Exclusive launch of the Joystick Zeemote, which converts the mobile phone into a pocket videoconsole and of the N96 smartphone.

Telefónica keeps its promise and increases its stake in China Netcom to 9.9%.

Telefónica exceeds 150 million accesses in Latin America

The project 'Educar para Crear' (Educate to Create) is unveiled in Madrid, aimed at informingyoung people about intellectual property rights.

Telefónica teaches elderly people 'lo fácil que es el móvil' (how easy it is to use a mobile phone)through educational chats.

Telefónica joins the initiative 'El Salvador Verde' to promote good environmental practices in companies.

For the fifth year running, Telefónica appears in the Dow Jones Sustainability Index.

Telefónica attends the United Nations forum on progressing towards achieving the Millennium Goals.

The multi-discipline arena 'O2 WORLD' opens its doors in Berlin.


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The European Commission singles out Telefónica as the Spanish company that invests most in R+D.

Agreement with Nortel to bring the MobileExchange to Latin America and take another step towards convergence of fixed and mobile telephony.

Telefónica concludes a global agreement with Facebook to include direct access on its mobile phones.

Telefónica announces that in autumn, it will market the Blackberry Pearl Flip, the first foldable device.

Telefónica Europe and Huawei begin theircooperation to extend 3G coverage.

Telefónica O2 Germany celebrates 10 years ofhaving been licensed as a transmission operator.

The new China Unicom is born,with Telefónica as the mostimportant private partner.

The sixth version of Play Pack comes out, a mobilephone for young people with services gearedtowards responsible use.

Telefónica takes part in the first edition of theCampus Party Iberoamérica (El Salvador) during the Summit for Heads of State and Government.

Telefónica participates in the Latin-AmericanCarbon Forum, taking part in the debate on climate change.

The King and Queen of Spain inaugurate the new headquarters of Telefónica in Madrid,District C, a sustainable industrial park.

Over 10,000 Telefónica Volunteers, family members and friends take part in the activities held on 'Volunteer Day'.

The King and Queen of Spain present Fundación Telefónica with the ‘Gold Medal of Merit in Fine Arts’.

Fundación Telefónica takes part in a studysponsored by the OECD on innovation in Latin America.

O2, an example for the protection of children andteenagers: sets up self-regulation in place inGermany to establish protection.

Exclusive marketing rights for the mobile phone with the largest screen on the market, the HTC Touch HD.

keteke.com is born, the first multiplatform social network open to users of all mobileoperators.

The O2 Telefónica network reaches 88.6% of the population.

Telefónica O2 Germany covers nearly 100% of the population with its mobile network.

Unanimous backing from shareholders for thepublic takeover bid for the Chilean subsidiary CTC.

Fitch raises its credit rating for Telefónica to A- /stable outlook.

The Telefónica O2 Czech Republic project to combat bullying at school receives a 'Golden Effie'and a 'Via Bona Award'.

The 'White Book', part of the programme Interactive Generations and containing a studymade up of 80,000 surveys carried out on childrenin Latin America, is published.

A collaboration agreement is signedwith WWF Spain to develop action ontelecommunications and climatechange.

Telefónica receives the 'Latin-American Award for Social Responsibility in Companies 2008',awarded by the Ecumenical Social Forum ofArgentina.

The educational portal EducaRed gets under way in Venezuela.

Fundación Telefónica and the OEI encourage the incorporation of ICT into education by means of international prizes.

On Universal Children's Day, Telefónica dedicates all its advertising space in Spain to Proniño.

First global launch of the Nokia 5800 XpressMusicto popularise access to touch screens and to music.

For the first time in Spain, Telefónica will use 3Dstereoscopic technology when advertising incinemas.

Telefónica ends 2008 with a market capitalizationof 74,574 million euros, becoming the fourthcompany in its sector worldwide.

S&P recognises Telefónica's good financial health with an ‘A-’

The Company announces the launch in Spain of the 'O2 Ability Awards', which recognisesustainable business models involving the disabled.

The Interactive Generations Forum is set up topromote the responsible use of ICT by children.

Telefónica is a founding member of the Foundation of the National Centre of Technologies for Accessibility (CENTAC).

The 'Day of Telefónica Interest Groups' is celebrated in Brussels.

The Brazil-Spain Chamber of Commerce recognisesthe work carried out by Proniño programme.

Telefónica presents the report 'The InformationSociety in Spain 2008'.

Telefónica makes a call to the new EuropeanAlliance to confront the economic crisis.

Fourth quarter

October November December

Telefónica, S.A.Annual Report 2008

This report is available on the Telefónica website at:www.telefonica.com

Shareholders may also request copies of this report from the Shareholders'Office by using the free phone number 900 111 004 (in Spain) or by sending an e-mail to: [email protected]

Likewise, the mandatory information that must be provided under prevailinglegislation is also available to shareholders and the general public.

Edition:The General Technical Secretariat attached to the Chairman's Office

Design and layout by:IMAGIA officina

Front page photograph:Ricky Dávila

Printed by:Egraf S.A.

Date of publication May 2009Legal deposit:

This report was printed on environmentally-friendly paper, as certified by FSC.

www.telefonica.com Annual Report

2008

Annu

al R

epor

t200

8 Customers

259 million customers accesses

Presence in 25 countries

196 million mobile phone accesses

43 million landline accesses

More than 12 million retail accesses

to Broadband Internet

More than 2 million accesses

to paid television

A 6.92 (out of 10) Customer Satisfaction

rating at the end of 2008

Investment

8,401 million euros of annual

investment (CapEx)

4,614 million euros invested in R+D+I

Professionals

257,000 professionals

69% rating on the Employee

satisfaction index

Environment

Commitment to reduce electricity usage

by 30%* on their networks by 2015

* Kwh/equivalent access

Corporate Responsibility

60,219 employees with training

in Business Principles

More than 1,100 suppliers evaluated

by the Extension of Business Principles

to the Supply Chain

Social and Cultural Activity

Close to 115 million euros in social and

cultural activities with 40 million people

benefiting from the 2008 initiatives

Some 22,000 employees are

Telefónica Volunteers

Thanks to Proniño 107,602 children have

access to school, contributing to the

eradication of child labour in Latin America

Results

57,946 million euros revenue

64% of revenue comes from

outside of Spain

A net profit of 7,592 million euros

1.63 euros per share of net profit

74,574 million euros of

share capitalization


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